QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Great. Thanks. Thank you, everybody, for coming. Welcome to the JPMorgan Healthcare Conference. I'm Casey Woodring from Life Science Tools and Diagnostics team here. I'm pleased to be joined today by the QuidelOrtho management team. I have Doug Bryant, CEO; and Joe Busky, CFO. So I'll turn it over to Doug quickly for the presentation portion, and then we'll have a Q&A session afterwards. So Doug? Take it away.

Thanks, Casey. Good morning, everybody. Again, Doug Bryant. I've been the CEO since 2009. With me here today, of course, as Casey said, Joe Busky, our CFO. Also here are Rob Bujarski, our Chief Operating Officer; Bryan Brokmeier, our VP of Investor Relations. And if you don't like the slides, it's his fault. And then also joining us as a Board member, Chris Smith, who [ is ] formerly the CEO at Ortho. So if we have a tough question, Chris, you'll jump in and help us out. So do I advance to that? Yes, here we go. So we will be making forward-looking statements. And just as a reminder, we closed -- the 2 companies merged together at the end of May. So the financials we're going to show are pro forma. So key messages, QuidelOrtho is a meaningful player in each of the segments in which we compete. We're either 1 or 2 or 3 in the market, generally speaking, particularly in the segments where we -- that we consider to be addressable. The integration of the 2 companies is going very well. And I'll show a slide in a little bit on the details there, but both from a financial perspective, but also in terms of the opportunity that we see in front of us. The more that we look at this, the more that we see there are opportunities to improve efficiency or effectiveness and for margin expansion. So we're really super pleased so far. Our products in each of the segments in which we compete are highly differentiated. And I would say that if you're a salesperson at QuidelOrtho, this is the time to be here. It's a very exciting time for our commercial organization. And really, I'd have to say their ability to generate demand is creating a problem, it's a good problem, but a problem from an operational perspective as we try to scale up and catch up with the demand that we're creating globally. And then financially, we're in great shape. With or without COVID, we're in great shape. And -- but I would say that COVID clearly now has joined flu, strep, RSV as an endemic virus, and it's not going away. I don't know what the latest -- I've got a note here because I can't remember each mutation, but there's a new one circulating right now. And as I watch you all roam around the halls, I wonder if we're going to run into that, what is it, XBB1.5? Did I get it right? Something like that. That's the new one currently. And we watch each of these rise in prevalence and then subside followed by another one. So I'm not saying that we're going to be back where we were a couple of years ago, certainly not, but I think it's going to join flu, strep and RSV as an endemic virus that we're going to see. And then we'll talk about how we model that moving forward. So QuidelOrtho now combined, again, since the end of May is a broader-based global in vitro diagnostics competitor. And we have expansive global reach. We have a big portfolio of products that makes it far easier to have conversations, particularly in the segments that -- where we compete best. And Rob was our former General Counsel, but since he's not the General Counsel anymore, I would say, this creates an opportunity for us to bundle our products in larger accounts. The word bundle itself is not problem. If you do it when you have excess market share, that becomes a problem, right, Rob? So we're not there yet. But it does create an opportunity for us. Ex COVID, we had strong financial performance, both in terms of revenue and margin in 2022. Won't talk about the number of people in the organization because I don't think that's super important. But what I would say is having 2,800 sales and customer service people throughout the globe is certainly a new thing for us combined and I think is one of the key reasons that we were interested in putting the 2 companies together in advance of the launch of Savanna, which I'll talk about here in a second. We have a solid addressable market. And again, we compete -- particularly in the segments where we do well, we compete very strongly in that addressable market. We have a huge asset in the number of instruments that we have installed across the globe, and that makes it easier to make decisions with respect to how we choose to make -- I was just noticing the people that didn't have a mask on a couple of minutes ago now have one on. So sorry. That's not in the script. And then we're financially solid, generating quite a bit of cash. Okay. We have a highly experienced management team. One might call us older, but we certainly have a great deal of experience. And so the things that we're needing to do moving forward over the next several years, we've done most of it ourselves individually and as a combined group. So we know what to do. The other thing I would point out, which is quite obvious, is the photos look better than we do in real life. And then the other thing worth pointing out is the layer of management below this, at least a couple of layers, is also super strong and experienced. Okay. This is a busy slide. And I had notes here that would have taken the entire 20 minutes. I'll try to be succinct. This chart basically shows the continuum of diagnostic care and all the different entry points where tests are generated. And as you go left, we become decentralized. When we go right, we're centralized. And you could make an argument that some tests are naturally going to go to the right because it's going to be more efficient to put it in the out-basket and have it sent to Quest or LabCorp. Some of those tests would be your routine chemistry tests, for example, or other panels that are part of your annual physical exam. I'm about to do my physical exam. I know I'm going to draw my blood. I don't have an appointment for a month. And I know certainly that Quest or LabCorp, I think in my case, it's LabCorp, we'll certainly get the results back within the month, right? So where doesn't matter, timing doesn't matter so much. It makes sense or where things are really state-of-the-art and new, for example, in oncology. It makes sense that it goes to a reference lab. But for others, and we can easily argue the opposite. The other way, we see a lot of movement as well. And I think that the COVID experience certainly increased public awareness, and that public awareness causes us to seek care when we don't feel well. And those 2 factors, I think, are we going to -- what I think will drive industry growth, not just for QuidelOrtho, but across the segment, we're going to see increasing demand for diagnostic testing. So I was told just to use the button. I could do that, but he asked me not to, Bryan. Bryan, you've got some wet hands. Okay. So we've been talking over the last couple of quarters -- it's from the water bottle. My next career will be in comedy apparently. But -- so there's hope. Over the last couple of quarters, we've used this slide a lot. You probably -- if you've seen presentations, you may have seen this or remember this slide. We use it internally a lot too as we travel around the globe, talking to employees, answer any questions. We use this to talk about our 5 strategic priorities which are: integration and the evolution of our culture to become not only compliant but also more effective, improving our execution, doing things well at speed, enabling people to make decisions that are appropriate at their level without fear. And that's an important aspect of culture. Product innovation, we're going to show a slide on that here shortly. Commercial excellence is also a very important factor for us, and the reason why we put the 2 companies together. Operational excellence, Rob could talk to this all day long, but we're doing a lot of things, making a lot of investments to scale, and that's an important factor for us moving forward and obviously, how we spend our capital is a key factor, too. Okay. Our goal for integration is to create a company of purpose that enriches and saves lives with a culture that promotes employees first and prioritizes actions that support happy, inspired and engaged team members. That's a lot. It's not though -- it's not a slogan. It's not a headline. For us, this is our intent. And this is -- for the executive team is our joint purpose. On the left-hand side are things that we've already gotten done. On the right-hand side are things that we're moving forward with. There's just a couple of things I think worth pointing out here. Doing all this and merging the organizations and assigning people to various groups throughout the functions around the globe creates sometimes a little bit of dislocation, but we still have 88% retention rate, which is quite good. And we want to keep it there or higher. And then the other thing on the right-hand side is realized value creation technologies. We are investing significantly in systems that support processes that will -- that basically will help us become more effective and more efficient. A lot here on this slide, but we've got a lot going on. I think the total number of R&D projects that we have is over 100 still, even though we've been reducing here and there. We're still well over 100 projects. During the one-on-ones today, if you happen to be with us, we'll be happy to go into detail on any one of these. But effectively, on the first column, you have the things that we're working on right now that are expected to be out in the next 12 to 18 months. In the middle, you've got 24 to 36 months, is that it, Bryan? And then long term, those are the programs we're working on there. Savanna. We talked about Savanna just a second ago, but this is one of the key reasons that Chris and I first started talking about putting the 2 companies together. We believe that Savanna is indeed a highly differentiated product. We've demonstrated in Europe and elsewhere that there is demand. We see pretty strong demand expressed by U.S. customers as well for this product, and we have a waitlist. So I think this is going to go well. You could argue that there are a lot of competitors out there in the space. You could argue that we just went through this period of time where a bunch of people already acquired instruments. I get all that. But this instrument's ability to push testing where the lab supervisors and the big integrated delivery networks want testing to be done, this allows them the flexibility to do it. And who knows? All of us in our -- in my time, I'll always talk about new product launches like they're automatic. They're not automatic. We need to show you. But I've been doing this for about 40 years now. And I think this is a unique opportunity for us. So I think this is a flagship product for us. If I'm wrong, you won't see me here next year. I'll be hiding. In terms of commercial excellence, we've just got so many different opportunities. Just the size itself and the global footprint is meaningful. But the cross-selling between the 2 companies is turning out to be a really nice opportunity for us. I list example markets, the U.S., Greater China, Germany and Italy, in particular, we're already seeing results. Distribution. Quidel brings a lot in terms of distribution, particularly at the Point of Care. And we're going to be able to leverage that in a number of places, particularly here in the United States. And then again, just the size, the 2,800 commercial teammates across the globe is going to be extremely helpful to the existing portfolio, but also to the new products that we intend to launch. Okay. He's going to rate my answers here. Can I go back one? There we go. There we go. So on the very top here, you've got what we did in the third quarter. You've seen these numbers before. Those are our actuals. In the middle segment, what you've got is the combined company guidance, what we had suggested actually as recent as the Analyst Day. This is what we told you that we were aiming for. And then in the bottom, you see actually what we did. Okay. So we can go into some detail on that, but we're doing better than we had suggested. I do think it's good to point out though -- and it's also good to look at your notes every once in a while that we, in Q4, ex COVID grew 18%. So that's pretty good. And then for the year in total, ex COVID, we grew 11%. So I know we told you 7% to 9%, but -- and then cost synergies. We want to stick to the $90 million that we said, but we feel very comfortable that, that's achievable. Not ready to tell you to change your models yet, but things that we suggested that we would get done have been identified at minimum and in many cases, already achieved. So we're in really good shape in that regard. Here's how we're going to deploy capital from what we think is the most important to the least important, at least at this moment in time. And things could change, of course. You could flip debt paydown and share repurchase depending on the situation. Right now, we think debt paydown is more important. And then finally, here's the 3-year outlook. So we still think we're going to do 6% to 9%. I do know that at Analyst Day, people did not like what we were talking about in terms of EBITDA margin because remember, in the [ S-4 ], we had said that we were going to do 30% in terms of EBITDA as a percentage of revenue. We adjusted that downward to account for FX and inflation. And we're assuming -- at least at that time, we were assuming 3% to 5% inflation and to still be experiencing pretty significant FX headwinds. Of course, some of the FX headwinds have become less, if you will. And I do recognize that a 3% to 5% inflation rate over the medium term here is a bit conservative. I would call it more thoughtful. And so the impact from the 30% is you got 150 basis points for inflation, and you got 50 basis points for FX. And so if you take those 2 combined, then you sort of hit the 28%. And so I'm reading the room here. So 28% is kind of where we think we are if we assume inflation at that rate if we don't account for the fact that FX is actually improving at the moment. And I think that's it, other than I have a closing comment. And just to say here were the priorities -- around a minute ahead of schedule. Here are the priorities, and I don't want to be flippant, but we're in good shape. We're in super good shape. I couldn't be more pleased with the progress. I was worried when we first put the 2 companies together, like I should have been. But all those things that we've put on paper and said that we were going to do, we've done. So I'll stop there, and we'll go to questions.

Thanks. That was a great overview. For the Q&A session, we do have a mic runner in the room. So if you have a question, please raise your hand, and he'll come over to you. If you're watching the webcast at home, please ask a question via the webcast question function. But I guess, Doug, Joe, to start, wanted to touch on the [ pre-announcement ] for the fourth quarter. You mentioned 18% non-COVID growth. That's presumably due to flu and combo A/B testing, correct, the upside there in the quarter, just given the strong respiratory season? Can you maybe walk towards if the ABC combo test in Sofia was the key driver there? Or was it the legacy flu products maybe in QuickVue professional? Just can you give us a sense of what drove that?

It's about half. It's about 50-50 between [ Sofia ] and our typical immunoassay products. 40% to 45% generally would be flu standalone. 40% to 45% generally would be combo. In other words, flu and COVID and the remaining 10% or so is RSV and strep. So I think we did [ 350-ish ] in terms of flu for the quarter, which is -- it's strong. It's a little bit higher than normal.

You notably didn't call the labs business out when talking about the strong points for the fourth quarter in the press release. Curious as to what you're seeing there just from a supply chain standpoint and also from a customer demand perspective across the different geographies, particularly in China?

Well, China is probably one of the drivers on the lab side. We're doing fine. In fact, the growth rate in the lab segment is as predicted. It is true that we're trying to catch up in terms of instrument placements, and we have more orders right now than we can ship. We don't know that we'll get through it entirely in 2023, but we're moving in that direction. If we could get down some level lower way under 600 on back order, that would be terrific. If we could solve it, if we could get it to down maybe around 150 on back order, I think that gives us another 2 points in terms of growth rate.

And then what sort of visibility do you have on working that sort of 600 instrument backlog down on the supply chain?

We're definitely watching it. But we have plans in place with our primary third-party provider. The real issue, as Rob could tell you in some detail, is around chip availability. We do see that abating somewhat. We're hearing a lot about chips becoming more available as other products, consumer products, in particular, that don't require those chips or that do require those chips, the demand apparently for those products is not as great as it has been. So whether that makes it into the health care segment, I don't know. But we're in the same boat, by the way, as everybody else. So our ability to solve this probably is no worse or greater than anybody else's at this stage.

Got it.

Is that fair, Rob?

Maybe the last question, just on the [ pre-announcement ]. Curious as to how much revenue Savanna contributed on the molecular line in Europe, given the strong respiratory season? Just can you maybe walk towards more broadly the traction you've seen in Europe for this sort of early launch there?

It's still early. And remember that we've only got one product in the market in Europe, and that's the respiratory viral panel. So it's super early, but we do have a handful of customers. And we still have orders that we have not shipped. In terms of the actual dollar amount in the quarter?

I would just say...

I don't know the answer.

I would say the molecular business unit had strong growth in the quarter, ex COVID. And so it's good. We can get more into the actual numbers when we do the Q4 call.

Okay. That's fair.

Okay. I'll pause here to see if anybody has any questions from the audience.

So just wondering on the legacy kind of QuickVue respiratory products, are you seeing a bit of a resurgence in that product line? And then as we think about it now, is there an opportunity to convert those to Sofia customers? Or how do you view that product line? Because pre-COVID, it was kind of declining and converting over to Sofia.

Yes, it's a great question because I've been forecasting the demise of that particular product line for a long time. And those customers that use QuickVue, and some of them are quite large, and they have reasons why they use it the way they do. They're really hard to convert to anybody, which is good, including ourselves. But it is true that we did see movement away from QuickVue and on to Sofia. The benefits of Virena was a selling point for those customers. But at the end of the day, COVID created a situation where everybody was very happy to use the QuickVue product. And of course, that QuickVue product is what's in a retail segment, so which has also been a growth area for us. So I would love to see more of it converted over time because I think it's more differentiated, particularly relative to competitors outside the U.S.

Looks like we have another one from the audience.

A question on Savanna. So thinking about Savanna and its sort of long-term potential [indiscernible] platform for the company, not being very scientific, just would you [indiscernible] rank your long-term application test menu for Savanna by revenue potential globally, the top half a dozen or so, and you can think 10 years forward, where is the most revenue potential from highest down?

Well, right now, in the near term, it's probably related to respiratory illness. We do see over time that the sexually transmitted infection category should be also a really nice growth driver for us as well. So when you look in the out years, you see that category increasing pretty dramatically. Yes, I think the GI panel is pretty interesting. It solves a lot of issues, particularly if you can break it into things that you're likely to see here in the U.S. versus if you traveled into the tropic somewhere. And you create 2 different, we call it a [ travelers panel ]. But I also like the vaginitis panel in this -- I like that category, and we see quite a bit of revenue in the out years there, too. There are some other things that are just going to be gatekeepers for us. Meningitis is one low volume, but we have to have the HSV, VZV panel, which we're going to include syphilis and now and potentially monkeypox as well. It's interesting. That may be something that drives the customer to make a decision because you have a more complete menu, but I wouldn't see that being super high volume. Is that what you had in mind?

Yes, Doug, maybe shifting to the long-term guidance. You mentioned the 28% normalized EBITDA margin in your presentation. Is that like the starting point for 2023, you would say? And then just what are some of the puts and takes to drive that higher by 2025?

Well, Joe is going to tell me to wait for the earnings call to provide guidance for the year. But directionally...

Yes, I mean, that's what we've said. The last 2 earnings calls, we said -- what Doug said is that the inflation, well, let me take a step back. The -- I know everyone likes to anchor back to the S-4 numbers, which I would do, too, if I were in your shoes. It's a data point out there. But those S-4 projections were done 1.5 years ago. And so we've had a lot of changes since then, namely inflation and FX. And the business is no different. The business is operating just as we expected it to be operating 1.5 years ago. So the difference between that 30% and what Doug mentioned, the 28% is sort of a jumping off point is driven by inflation and FX. And then the 2 drivers, I think, that will move it up further into the range up until the 29%, even above the 29% are the pace and the slope of the Savanna ramp and the pace of the synergies, the cost synergies. I think those are probably the 2 biggest drivers that will potentially move us up into the higher end of the range or even above the range.

Got it. That's helpful. And then maybe just within that 6% to 9% long-term growth guide, what's embedded for growth in each of your business units between labs, POC, et cetera?

So the labs business, we're pegging 5% to 9%, I think.

5% to 6%.

5% to 6%.

Yes, yes, mid-single digit plus.

I gave him the CEO answer. I get to do that. Yes. Okay, conservatively 5% to 6%.