QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

All right. Well, we are right on time here. I'll get started. I'm Andrew Cooper. For those of you, who don't know me, I cover diagnostics here at Raymond James. We're happy to have you in person. Happy to have the Quidel team as well, who I think we've got some fond memories of the last in-person event that might have happened before COVID really took hold in March of 2020. So we've got Doug here who's going to give us an overview quickly, and then we'll be joined by Randy as well, CFO, up on the stage to get into some fireside chat questions after that. So with that, I'll hand it over to Doug.

Great. Thanks, Andrew. Good morning, everybody. I'm here with Randy Steward, our CFO; Ruben Argueta, our Head of IR; and Scott Searl, who works with Ruben. It is true that there's some interesting time when I was here last. It was March 3. March 3, it happens to be my mother's birthday. So that's pretty easy to remember. It was also the day that right in the middle of -- during one of -- one of our one-on-ones, I got a call from the White House, and I told people I had to take it, and they were like, what do you mean you have to take a call? I said, no, I got to take this. And then Randy and I and Ruben, we're at the airport on that evening and our flight was delayed, the United, and delayed significantly. So we didn't leave on time. And therefore, I was there -- sitting there when I got another call, and they want -- they wanted Randy and me to go up to the White House to visit with the Vice President Pence. And so that's -- and I had already told our Board, yes, we'll go ahead and do this, but I don't think we're going to make much money it's just -- because I kind of thought it was going to be another Zika virus thing, right? So -- but we had that meeting on March 4. On March 9, I think we submitted our PCR assay to the FDA. And on the 17th, we were cleared. It was that quick. And then on May 8, we actually had Sofia cleared. We were the first rapid antigen test to be cleared at that time. So you're right, interesting, very interesting times, and it started right here. We will be making forward-looking statements. It gets longer and longer, we just make the font smaller, so. Here's the history of the company beginning back when the company was founded, and then in 2009 to present. 2009 happens to be the period of time that I've been there, I started in February of 2009. And we've done a few things along the way, and we can talk about those during Q&A, if you like. But we haven't really been super acquisitive, but the things that we have done have turned out okay. So we have had what I would call 3 transformative events, the first of which is the acquisition of the Alere assets from Abbott in October of2017 and people said that was a pretty important event for us. And in fact, it doubled the size of the company. And it was the first major integration that we did that was global, and it was a little bit different because we didn't actually buy the company. We just bought the asset. So we had to stand up our infrastructure across the globe, while on a -- several TSAs with Abbott. So Abbott was performing those services, and so we are able to get all that done and we got it done actually ahead of schedule. So I say all that because we're about to do something similar, but in a funny way, it's going to be easier, so. The other event that we just talked about, we don't have to go into further details, but COVID has changed a lot of things in the world today. But for us, it's changed our manufacturing footprint, it's changed the way we think about supply chain. We're a much larger organization. We used to manufacture about 40 million tests per year. Now we're doing more than that in a month. So it really has dramatically changed a number of things, and it really kind of showed us where our strengths and our gaps were. We obviously have a super-strong R&D organization, super-strong clin/reg, and we're kind of known as a product company. We're a technology company, and -- but we've always been small. And we never had really the geographic footprint, particularly commercially. And I would say even on the clin/reg side, we're super strong here, but we still don't have all of our products approved in China. We still don't have all of our products approved in Japan or Brazil, et cetera, et cetera, and we're not cleared in Russia, I guess that's okay. That was meant to be funny. I know I'm going to get the supply chain question, so you guys just need to decide who's going to ask me that one. And then -- but we're solving that with the Ortho acquisition. And I know many of you might have paused a little bit and wonder how did you arrive at the conclusion you needed to do that, and we can certainly talk about that. So this third transformative event, it's going super well, but it gives us a big market opportunity that we would be chasing. The $3.9 billion and trailing 12, obviously, that's out of date that's through the end of Q3. We've already published Q4, and I've already told you all that we're about to have the largest quarter in the history of the company by far. And -- or how about if I just say noticeably larger than -- well, I did tell you, it's going to be larger than the previous largest one. So you know what that quarter was, right? So that one started with an [ 8 ] as I recall, for the quarter. So we will be modifying that. We did submit our amended S-4. We had a couple of questions from the regulators. And so we filed our amendment is today, is that Monday night? Did we file the amendment on Monday night, and we also filed an amended 10-K, and that will have the updated, so you can get visibility to that [ shortly ]. Lot of employees now. The most important part is that we have a much bigger commercial organization. And as previously discussed, I think the synergies are significant. I will say confidently that they are conservative, and particularly on the cost side. We are already finding -- in our integration planning discussions, we're finding a number of things that we have not modeled yet. So it's going super well. We have about 15 different work streams. We have people paired from both companies and each has presented now their blueprint, which Randy and I reviewed on Monday, and I think it's going extremely well. So these are the details, but you can read all about that in the S-4. And there, again, is the $50 billion. People have asked me, did you really want to slow down your growth rate? You presented a couple of years ago your 5-year plan and you said, absent COVID, you'd be growing mid-teens CAGR. And which just -- which makes us obviously the fastest growing diagnostic company in terms of revenue growth. And the answer is, yes. We are slowing down because we're acquiring a business that's growing mid-single-digits. But still, we're still going to be 9% to 11% in terms of growth. And I actually think that, that again is conservative because they're going to do a lot for us internationally from a commercial perspective, but I can already see that in the United States, we can be helpful to them as well. So I do think that we've modeled it pretty conservatively, of course, as we should. But we definitely, I think, should be able to achieve that growth rate there. And then doing it north of 30% in terms of EBITDA, as a percentage of revenue, I think it's respectable and puts us in an elite class relative to our colleagues in the industry. Lot of cash and pretty good ROIC. We actually had a number in that -- in the previous presentation. I think somebody got even further conservative, [ both of you ], all right. This makes us the seventh largest diagnostic company. We have aspirations to pass a few of those guys ahead of us, and I think that we should be able to do that. Internally, I told the team, I would love to be #3. I mean, that doesn't sound like much of a task, but at the same time, #1 and #2 are pretty darn big. So -- but we definitely see ourselves able to leverage the growth drivers and to be super competitive moving forward. The big growth drivers, of course, are Savanna, leveraging our massively larger installed base of Sofia's, and then don't forget, we're launching a high sensitivity troponin, which would be -- if we're able to get through the FDA, it would be a pretty significant competitive product in the cardiometabolic space. I think I said most of this already. This is how we designed it to get after integration and to do the planning, but the truth is that Rob Bujarski, our COO; and Randy and I didn't feel like we had enough visibility. So we're actually involved, and we're -- as I say, we're actually watching them make the sausage. So we're not waiting for a steering committee meeting to find out what's happening. All 3 of us were actually in the meeting with the entire team on Monday, and that's just kind of how we operate. So I know this is kind of a nice looking chart that describes the process, but I would say our process is -- they are not a process, process. Yes. We still are going to operate just like we always have. It's us 3 plus -- we're now going to have Joe Busky, and also Mike Iskra who will be our Chief Commercial Officer. But it will be a small team of people, who are making a lot of decisions, and we'll continue to go just as fast as we did before. That's Savanna, that's beautiful, performing very nicely in Europe right now. We're hearing really nice feedback. I think it's the right design for the market at this time. And I think it fits the gap that -- and we're seeing that already. It's fast. The cycle times, they are almost like [indiscernible]. Each cycle is like 7 seconds. And so most of the time, it's not actually around thermal cycling, it's around the other extraction and all the other things. So and just as a reminder, it runs 4 PCRs simultaneously and each PCRs is your traditional 4-color PCR. So we'll use one of the colors to do the control. So you'll end up with 16 total results, 4 of which will be controlled. Okay. And then the key takeaways. We're -- I think we're ideally positioned better than we ever have been. We're the beneficiaries of COVID in terms of a number of things, but the most important thing is our control over the supply chain. We're now able to compete finally with the larger players in terms of volume that we manufacture. And I think as we consider the opportunity, the possibility that we might be in the OTC space, we already have the manufacturing capacity to do that. So I can't fully commit to it because the FDA at the end of the day has to say, yes, you can have an OTC license for flu and strep and other things, but we're certainly going to pursue it. Commercial excellence. They've got a great team, so do we. They're obviously massively larger, ortho that is, on the international side. But our U.S. team is really quite good and the relationships that we have with all the major integrated delivery networks are superb. So I think we can be helpful to them, and they are helpful to us here in the U.S. I mentioned Savanna already. I'm worried more about -- I shouldn't say worried that's not the right word, I'm more focused on the culture. We have a culture that I realize is unique. We're probably overly focused on the idea that we want our employees to be happy. I have this notion, this idea that happy employees are more productive, and you have better outcomes and those better outcomes then in turn make us happier. And it's just a loop that [ feeds ]. And people who don't like to be around happy people tend to self-select out. So I don't really have many severance packages. People just don't like to be around happy people if they're unhappy. And so they go to other companies, where they're happier in their unhappiness, if that makes sense. Should I stop? You have questions. It looked like you're ready to go.

We -- I mean, you're doing great. But we can move to fireside chat, if you want, it's up to you.

Yes. All right. I'll sit down.

Randy, do you want to come up and join us? And I know we don't want to spend all our time on COVID, but I know I'm going to be brief from the audience, if I don't ask at least a couple. So maybe let's get those out of the way.

Sure.

First, look, I'm not going to ask you to predict what's demand next week. I don't think anybody knows. But when we think about the longer term, I think the question a lot of people still grapple with is, is it PCR? Is it antigen? Is it over the counter? Is it singleplex? Is it multiplex? Is it flu-COVID or is it RVP4. So maybe just taking a step back at a higher level, what do you think that environment looks like maybe as things continue to normalize and get to a steady state?

Well, I think everybody realizes you can get free COVID test now, right? So the retail segment has fallen pretty dramatically. And so now you have consumers that never really were concerned about cost. That person still goes to CVS and buys the test, but that number is dramatically lower. And we've been engaged in conversations with the government about assuring them that we're not going to lay off people, that we're not going to slow down, that we're going to continue to ramp. And so we've been having conversations with HHS, DOD, other departments, including the White House about warm manufacturing. We've also had numerous conversations with folks in Congress about our inputs, our supply chain, where that comes from because there's a bit of interest in making sure moving forward that these -- that the government is not -- the government's Federal and State are not going to be buying products that have significant inputs that are not derived from the United States. And then particularly, they have in mind a couple of countries that they definitely don't want product coming from. So we have ongoing conversations about that. There's also conversations about stockpiling. The NIH is particularly encouraging this thought of let's not have this happen again. I think people, regardless of what side of the aisle you're on, are concerned that this not become another economic situation. And so is it prudent on the government's part to think about how to make sure that Quidel and Abbott, in particular, don't slow down their manufacturing. So I think -- I can't predict what will happen, but I think it's highly likely that you'll see a pretty significant demand for COVID products, at least through this year. And to your question about flu, flu right now, I saw yesterday in the United States positivity rate of those being tested is 16%. That's significantly higher than it was 2 weeks ago. So we're seeing a little bit of a resurgence. I think the world will have changed now. People do think about, if I'm not feeling well, I want to be tested for something. That's a change from the old days, where only 30% of people, who felt bad got a flu test, right? So I think that's going to change moving forward. I think combination assays are likely. And again, I don't know what will happen with OTC, but we certainly are going to see if we can have our other products approved as well. And then I'll mention one final point, and that is, there's a lot of little manufacturers of these products. And I think that some of that will get scaled back because the FDA is now requiring that beginning January 2023, you must have your products 510(k) cleared. And therefore, if you do not, you will not be allowed to sell products here in the United States. So did I leave anything out?

No, that's great. Maybe jumping on something you said earlier in that answer in terms of warm manufacturing. One thing, I think it's not something a lot of us are used to thinking or talking about before this or at least myself, tried to get a little smarter with our health care policy guy. And one thing he pointed out is, hey, that's not always manufacturing full product. Sometimes it's the piece of the process that would be the bottleneck are slower to ramp up. So in those discussions, is that coming up? And sort of what does logistically that actually look like in terms of what warm manufacturing might actually be?

Well, the intent, obviously, is to not have us slow down in any way. And they realized that if we were strictly managing our P&L that we might want to ramp back down at least temporarily. But who knows when the next variant is going to surface, and so folks want -- have to be ready. Your question is a good one because it's not super well defined. It's a number of different conversations with different departments, and they have a different way of expressing what they think is necessary. And so some of these things were not -- they are not done. For example, we have conversations routinely, well, every Friday at minimum, we have a conversation with HHS and a couple of other departments. And then more recently, we're coming to the end of an agreement that we've had to supply product, which we, I think, we will complete by May, but they're already asking us for the next tranche. And somebody earlier in our one-on-one said, "Well, do you have an agreement in place?" And the answer is not yet, right? So none of you guys -- none of you has written about it because I don't have an agreement, right? But I can tell you that it's just highly likely that we're going to be shipping a lot of product to the government. Also the states, there are states that are already talking to us about the stockpiling as well.

And maybe before I move on from COVID because I do want to talk about all the other things, and you hit on it a little bit here. You guided to biggest revenues ever in 1Q. I think you maybe sneakily just told us that you might finish that contract a month earlier than you had sort of implied on earnings. I think you had said by the end of 2Q and now you say, May. So -- and we all see case counts, just what -- what's the latest and greatest there? The government seems like it's still ordering nicely. Are you seeing any changes in the true commercial? Any flavor you can give?

Yes. Andrew, remember that -- and I think Randy would have commented on this, as I recall. Remember that we didn't ship a lot of products to the federal government in the fourth quarter.

[ $3.5 million ], I think you said.

Yes. Good memory. Yes. So -- and the reason that we didn't was nothing more than us negotiating with them to say, please don't make us ship you all the product because I got Walgreens and CVS, who are -- they're on us, right? And they -- we never did give either one of those 2 -- the products that they asked us for. And that created several conversations, most of which Randy handled for us. Thank you, Randy.

It's a pleasure.

These are 2 very large companies, who were complaining quite a bit and actually complained to people on the government that we weren't supplying what they wanted. And so we had a little help from the federal government deferring what they wanted. And then more recently, we've been manufacturing more. In fairness, we had a little bit of a bottleneck with extraction reagent and the tubes. We have 7 different manufacturers of that particular component of our assay, but we're now pretty up to speed. We've brought on board one other major company that's on that chart and their -- we're buying their supply of extraction reagent and that's being manufactured in Indiana, I think. So yes, we are going to finish that contract a little bit earlier, but it's also because I think we manufactured 16 million tests last week. So we're now 7 days a week. We have labors on board. We did lose a few people to Omicron for a while. We have about 38 people or something out of the factory. That's a big number when you only have 400 people in the factory, right? So -- but we're now -- and we did lose a few people here and there because of wage rates. We had to increase our hourly rate. And so we solved for that. And we now have the people that we need to staff 24/7. So we're kind of at that level. We have some space that we could put some more equipment into if we needed to. But after that, we'd have to stand up another building, and I'm not sure we're thinking that.

One was enough.

I think so. I mean I have some conditions that I expressed to the White House about the conditions under which we would consider doing it again. But those conversations have not yet been productive.

And I want to make sure, like I said, we talk on some of the other topics. So maybe just jumping to Savanna now. Thinking about the -- I think the synergy side of things, maybe give a sense for -- you've laid out somewhat what the menu is going to be. You've got RVP4 now, you're going to have RVP11, HSV/VZV, GI, pharyngitis, I think you had on the slide. When we think about the rollout in international versus U.S. and maybe closer to the point-of-care versus more in the hospital setting, how do we think about some of those panels and kind of being more applicable in different locations and what that rollout looks like from a footprint perspective?

We launched in Europe, it was the safest, easiest. We have a direct sales force there. And so we've placed units with a small number of customers. Each one of those -- well, one in particular, dramatically increased the number of units they wanted after they had experience with it. So that was encouraging. We're receiving some really nice feedback. But that's just RVP4 at the moment. STI is important to us and important to many customers, this HSV/VZV panel. We like our STI panel because I think it solves some things that Sofia can't solve and that we're doing not just GC and Chlamydia, but we're also doing Trichomonas and Mycoplasma genitalium. So those 4 comprise most of the sexually transmitted infections. And when you got -- if you're negative for those 2, somebody's sending it to the lab to have Trichomonas vaginalis and Mycoplasma genitalium. So we think that one is important. I like our GI panel. We've got a panel that has -- that is absolutely applicable here. But we also have a different panel that I would call it a travelers panel. Yes. So that would be more applicable in other parts of the world. We see demand right now in Europe. We think we will see demand in South Africa pretty quickly. And then here, it's just about -- it's a matter of timing in terms of FDA clearance.

And in terms of that, that pathway here in the U.S., FDA clearance one thing, the complexity of the lab it needs to be in, or whether you're CLIA waived is another, what's the latest and greatest thinking on that pathway getting closer to the patient?

We intend to be CLIA waived.

Day 1 with the launch?

Yes. And so our cartridge will accept liquid sample or actually directly from a swab, and it can't get easier than that, right? But the swab, the cartridge [ catches it ] in the instrument and it goes, so.

And I do want to talk a little bit more about Ortho. I think you hit on -- at a high level. I think it's interesting, this started as a merger of equals and actually as a partnership first in terms of the discussions and you laid out the [ CC ] and how it is kind of the 2 coming together. Maybe talk a little bit about the managerial level, give people comfort because I think nobody wants to see disruption and there's always that concern. And so you pointed out that Alere was more of a carve-out, this isn't. So how should we be thinking about that managerial level? And what you're doing to manage that potential for disruption?

Well, I've completed the task of identifying what I would call L1, the folks that would report either to me or to Rob and also Level 2. And remember that when Chris Smith came on board did a nice job beginning in 2019, I think they actually improved their growth rate on revenue pretty significantly, he brought in a level of management from the outside. But below that, you've got some pretty seasoned former J&J and other Ortho folks in that organization. And I would say they're pretty strong. And the culture there is also -- is quite good. So I don't see disruption. We will lose some people here and there. We've lost our VP of Finance, who's going to be somebody's CFO, right? And that happened because we put the 2 companies together and despite the fact that we put a retention package in place, as you do, the money wasn't the important thing. It was the opportunity to go be a CFO in a publicly traded company, and so we lost her. So we will have these occasional disconnects, but it won't be for obvious reasons. It will be because we've got people, who -- we have talented people in both companies. And we -- I don't know how many calls you get these days, but I'm still getting calls all the time, right? And so if I'm getting calls, I assume Ruben's getting calls and everybody else is getting calls, right? So it's a pretty frothy labor market out there right now. There's just not enough folks to fill the slots that people want. So we're doing our best to minimize disruption. But I'm not worried because at the management level, I think their organization is pretty solid, and I know ours is.

Well, I didn't remotely get through the questions, I wanted to. So we'll have to save some for the breakout because we're out of time.

Sure.

But if anybody wants to follow us down to Amarante 2, we'll be there, and thank you so much for joining us.

That's the list of questions.