QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Good morning, everyone. I'm Andrew Cooper, Lead Diagnostics Analyst here at Raymond James. Happy to be joined by the QuidelOrtho team, this morning. With me is Doug Bryant, CEO; and Bryan Brokmeier with IR.

Without further ado, we're going to do a fireside chat, so we will just dive right into it. Maybe Doug, just start us off, can you take a few minutes and give us, some folks that might be a little bit newer to the story, background on the company, areas of the market you play in, and how you're positioned and how that's changed over the past few years as we think about adding in the Ortho business and so on.

Sure. Well, first of all, Andrew, thanks for having us. Closed the deal at the end of May last year, it's been transformational for the company. The 4 business units that we have for our business are: The labs business, which is the biggest. That's the clinical chemistry and immunoassay analyzers called VITROS, represents about half of our revenue. The transfusion business is, what, 20% to 25% now in total, pretty steady. We had closed a couple of larger customers over the last several years. You saw a little bit of an uptick in the last couple. As we move into this year, obviously, a little bit tougher comp. But we now expect that business to grow in the 2% to 4% range, as we develop a product that we're right now just calling our next-gen donor screening platform. Assuming we're successful there, I think there's an opportunity for growth that would address the screening of the plasma market. Point of care, that's the business that has our QuickVue and our Sofia product lines, plus Triage, the MeterPro products as well. That's a pretty big chunk of the business. And then our molecular franchise is at this point in time, small, but in advance of the launch of what we hope to be our next flagship product, which is called Savanna.

Great. And we're going to dive into all of those. But maybe first, a lot has been made over the years of this push, just generally towards the patient, whether that's primary care, the ED, the stat lab, now OTC. I don't want this to be a COVID question, but thinking about everything and how it's changed over the course of the last 3 years in general, how has that either reinforced your preexisting thoughts on getting towards the patient or change them, as we think about, again, the changes that COVID has driven?

Well, it's a good question. We've long held the view that there is a continuum of diagnostic testing. You can see some testing naturally migrates to the central labs and you see other tests that would naturally move closer to where the patient lives. We've long held that there should be an OTC market. And most of the time, I think people thought we were shooting ahead of the duck. But the change in philosophy with respect to respiratory disease, particularly in the U.S., I think portends well for further decentralization and to various segments, whether it's urgent care, small clinic and again, even OTC. So, I think we're well positioned. I think we benefited from this experience, not only as an organization rising to the challenge that was presented to us, and actually strengthening the determination of an organization. I think it's been really good, philosophically for our company. But at the same time, we had to scale up in a way that was dramatically beyond what we thought we could do. And so we went from a company that was manufacturing 50 million tests or so in the San Diego facilities to, in one plant at one point in time, doing 16 million tests a week, in an automated fashion with only 400 people. So it's been transformational. It was -- is transformational as our acquisition of dealer assets. And I think it's transformational as now we're living through with the merger with Ortho. We, as a consequence, benefited greatly in terms of cash generation. And, I think that we've been wise stewards of the cash, and that's what's gotten us here today. In prior years, I would have been in one of the cubes up there with a lot of noise and suddenly, I'm in a room.

Nice, when a lot of people want to meet with you, right?

That's true. That's true.

Maybe just kind of sticking with that. We've seen the first EUA for Flu-COVID combo, OTC. I guess just give us a little bit more color on how you guys think about that OTC opportunity. Whether it's flu, stand-alone, COVID stand-alone, respiratory combo, something else and whether that's a product or a market best served by QuickVue, Sofia Q, we've talked about at times, Leapfrog that we haven't talked about in a little bit. Just what's the best out there?

Well, I think unsurprising that the FDA was interested in approving another over-the-counter product that was molecular. I think there is a preference for molecular products generally. And, I do think -- because of performance, but I think that, that's better served actually as a technology for the hospital inpatient market. Outpatient, I think we've demonstrated that what we're now calling rapid antigen, we never called it that way, called it rapid antigen before COVID, but that format is particularly useful and it's useful as an over-the-counter product. And we were asked -- actually, we were asked to submit data on OTC Flu and OTC RSV in the QuickVue format and we've done so. So we await the conclusion of the review of those products. So in other words, another way of saying it, the data at the FDA on those 2 products are under active review. So, I don't know what that means moving forward. Important, the retail segment will be when we forecasted -- what we forecasted of the products that are in the respiratory category, we're really looking at just the symptomatic patient in the professional segment. We don't -- I don't think it's easy to forecast what might happen with the government, and it's certainly not easy to forecast what's happening at retail.

So any incremental approvals there, anything like that would be on the -- would be upside?

Yes, it's not in our model.

And, I guess while we're on the topic, let's go ahead and kind of hit on respiratory. You're pointing folks to $200 million to $400 million of endemic COVID. First, I feel sorry that you have to put a number out there in the first place because nobody can really nail down what it is. But can you talk to us a little bit about how you arrived at that $200 million to $400 million number in context of sort of where flu was for you, and where are some of the drivers of that being the right range really come from?

Yes. We -- typically, finance organizations will look at it, at least a couple of different ways and one from a top down and what's logical, and looking at historic data in the professional segment. I think, that's a reasonable way. We also rely on marketers to more of a bottoms-up approach and almost do an account-by-account analysis. Now it's a little difficult because when you look at the total number of customers that we have, respiratory customers, it's about -- in the United States, it's about 93,000 and it is a little bit of an overlap. So we're double counting customers that actually run QuickVue and Sofia. But Sofia customers, it's approximately 21,400. QuickVue customers, it's about 72,000. So it's kind of hard to do a complete bottoms-up by name, but I think, they do a pretty good job of coming at it from a couple of different ways. And it's a pretty big range to $200 million to $400 million. And we did the same on the flu side. I think, we said $230 million to $270 million. That one's a little bit easier to call. But you also have to remember that we don't know what the market is at the time because of the volatility of respiratory seasons generally. I mean nobody anticipated what happened with RSV, for example, I'd have been -- had you forecasted that, you would have been -- you've been a pretty sharp person. So overall, I think it's safer, Andrew, to think about it as a respiratory season just generally, which includes a number of different pathogens. Right now, by the way, circulating seasonal coronavirus and adeno, that's what everybody in the audience has if you have a runny nose.

Hopefully, not everybody in the audience. I don't want to get it, as well. But maybe just last one on that, and I know it's another kind of tough one to answer, but it's one, I get a lot, when we think about that sort of respiratory guide ex-COVID, it's, like you said, mid-200s flu, I think, 80 to 105 of -- come to other respiratory for the year. That compares to about $125 million of flu pre-pandemic. The question I get a lot is how much of that lift is share gain versus sort of same-store volume increases versus maybe something else driving that?

It's both market growth, fever and a cough, many more people are going to urgent care or seeking help from a health care provider in some way. So the market has changed. The propensity of an individual to want to get tested has changed. It's increased. But it is also true that we were in -- it was actually this conference where I got the call to go to the Vice President's office. And, I was asked -- I was asked, I was -- yes, I was asked. Will you do these tests? And that was March 4. March 18, we had in market a PCR assay. And then by May 8, we had Sofia launched. And then at the end of the year, we had the combo on Sofia 2. So we were able to leverage that position we had in the marketplace for a while. We were the only ones in the market. And we secured longer-term agreements to purchase not just COVID, but the other products as well. So we did take advantage of the situation, and we did gain share. And, I think we picked up in that first year 6,000 additional customers, as an example.

It's the only time I've had a meeting interrupted by a call from the White House. So, that was fun at least. Maybe shifting gears a little bit to the labs business. At Analyst Day, a couple of months ago, you talked about 5% to 6% market growth. You also talked about aspirations of getting that segment up to double-digit growth. So maybe just give us a little bit of sense of how you get to a rate that's close to 2x the market over the next handful of years.

On the labs business?

Yes.

A couple of things that are important near term. One is to increase our instrument manufacturing. Right now, we're sitting on a back order of about 650 analyzers. In a given year, we would expect to exit the fourth quarter with a back order of about 150. So that's a pretty big gap. If we were to solve that, and that will be really hard to solve this year, but we'll move it down lower. But, if we were to get down to that 150 level, that would be the equivalent of about 2 points in growth rate for the overall business, not just the labs business. And so that's pretty important. Installing the next 2 manufacturing lines in Rochester to do the slides also pretty important. And then the continuation of the strategy that for the mid-market where we put together both sides of the VITROS platform to include clinical chemistry and immunoassay, internally, we refer to that as our integrated platform, that's pretty important too because the pricing on the immunoassay side is higher, and the margins are better. We're also investing in our manufacturing facility in Wales, in Pencoed. And anticipating that we're going to be needing to have higher volumes of immunoassay as well. So, I guess the short answer is, if we can get to the point where the mix of immunoassay -- ratio of immunoassay to clinical chemistry is better, that helps with the growth rate quite a bit.

Okay. Helpful. And then a little bit more on the near term. China was a tough market in the fourth quarter, think for the last little while just with the 0 COVID policy. I guess from that perspective, can you give us just a reminder of how much of that business is in China? And then what have you seen from a utilization perspective of late in terms of the recovery there as they've opened up?

Yes. The lockdown created a situation where patient volumes were down dramatically. I think in some cases, 25%. So, it was a big hit to all of us in the segment. Having said that, December was a return almost to normal. January, even better. I think our forecast for the first quarter from China is quite good. In a normal year, China would represent 15% of the labs business overall and 10% of the total business is China. So it's pretty important to us, and recovery there is critical. We are making investments. We're doing a lot of work around joint ventures to improve manufacturing of reagents and instruments as well in advance of issues that might surface with the hint that biolocal is going to be important. We're not seeing that right now, but we want to make sure that we're anticipating what might happen. So that's why we're doing, what we're doing today.

That was my next question was around the biolocal. So can you just give us a sense for -- I think you've given a couple of different milestones that we could expect over the course of the next year. When those might be? And, then it sounds like you're saying it is more playing offense in terms of the biolocal requirements. But is there any amount of the market that you feel like you're sort of boxed out of without that?

I don't think so at this stage. Although, I will say there's a new document out to be transparent that talks about pharmaceutical pricing in China. And we're going to look at that more closely and see what, if anything, might -- what impact, if anything, we might see on the diagnostic side. It's really early. I guess, we read the memo. I think, I read it on the plane coming in here last night, so it's pretty fresh. But notwithstanding something like that, I think the JV that we already signed is important on the reagent side. And then we're still working on the instrument side as well.

And that was a midyear for the first set of instruments, if I remember, right?

Yes. I mean, I hesitated to be more specific than that because I -- we still don't have the deal. So, I think, once we have concluded the arrangement, then we can probably give you a better forecast for what they might do.

Okay. Fair enough. I do want to hit on transfusion medicine. I don't think we talk about it a lot. But again, thinking back to that Analyst Day, you talked about 2% to 4% growth in that market. The guide for the year is more flattish. So just give me a sense for sort of what the holdups are there, especially as we hear from some of the folks that play in plasma that we talked to you, I think donations are expected to be up for the year. So just what are some of the moving parts there this year?

The real thing is just the comp. We secured the business at CLT, which is one of the larger testing facilities for donor screening in the world, and that's now a $70 million customer. And, so that's all now in the numbers. So we had a period of time for the last couple of years where we were bringing on that business. And we don't see a lot of additional customer movement at this time. We are developing a next-gen platform for donor screening. It would be more automated, and I believe would be a welcome product in this segment. If that's true, and we're able to capture more market share on the plasma side, that's, I think, where the growth will come from. Right now, plasma screening is still growing in mid-teens. So it's a nice area. Our market share there though is low. We own the red blood cell side, and that is true. It's popped back up over the last couple of years. But we're going to be, in 2023, reasonably flat to 2022, which was increased over '21, et cetera. And it's mainly just a comp issue.

Okay. Helpful. And want to make sure we talk about Savanna, talk about molecular, so maybe we'll go there next. We're almost 2 years out from CE Mark. I guess, just what's the latest and greatest feedback now that you've been through a full, I won't call it a normal respiratory season, but a full respiratory season and has the utilization trended sort of as you've expected, at least since you last communicated around Analyst Day?

Yes. The utilization is actually higher than we had forecasted. I think, we had a number at one stage [ $21,000 ] something for a box or -- in one of our marketers models. And we're now seeing that that's actually -- that's too low relative to what we had expected. It's also true that we did struggle early on with instrument manufacturing. And, I would say that better visibility to what's going on in that factory has been helpful to us, and a lot of the issues, Andrew, that we were working through early on, have now largely been resolved. And, I think we have the ability to have an effective global launch of Savanna, assuming we can get the cartridge manufacturing to where we want. We've started with a low volume line. We're doubling that now with another low-volume line. And we expect to have our higher volume line that will produce the millions of cartridges that we're going to need to support the market. That should be validated sometime in the first quarter of 2024.

Helpful. And maybe just thinking about the path to launch. Is there anything incremental since you last spoke about the conversations with FDA, your expectations on EUA versus 510(k) or anything in that front?

We expect EUA either in April or worst case early May. We also expect to take a similar data set and submit for 510(k), in May. And then we expect after that to complete a number of clinical trials, first of which would be our HSV/VZV and syphilis product. And that, I hope will result in fourth quarter revenue of both RVP4 and HSV/VZV. If we're surprised with some quicker reviews by the FDA, that could change. But for the moment, we're still sticking to this idea that we should be able to generate $30 million to $40 million in Savanna revenue, which obviously includes what we're doing in Europe now, too.

And just to be very clear on it, from the FDA perspective and kind of your confidence on the EUA, I mean my sense is they're working through what's there, right? And they've made some comments that I think, caught some noise in the media about not considering EUAs anymore, but that was more about not necessarily taking new submissions versus working through what's there, correct?

I think people misread the announcement. And, when you listen to Tim Stenzel talk about it, it's pretty clear that they're not intending to not review EUA submissions. I would say, in fairness, though, that they have been burdened for quite some time on a huge number of packages, that they've had to review. So, it would be understandable that they would not be excited to be reviewing thousands more. But for things like Savanna, RVP, and what they perceive to be the value there, you'll see them reviewing and approving EUA packages, including the one that you just saw for OTC.

I want to move on from just talking about revenues. The 2023 EBITDA guide was basically the same margin range as the LRP, so bracketing 28% or so. This year has a little bit extra COVID. We won't see all the synergies on the other hand that you expect to capture from the combination. And this is a topic we get a lot of questions on. So, should '24 be higher than '23, '25 higher than '24. How do we think about that progression in terms of COVID rolling off, but some of the benefits coming on?

I think we need to get through the Savanna launch, a period of time during which it will be a little bit of dilution as we ramp up volumes. It's also true that there's a couple of other variables that are not helpful. And, I think we've adequately judged those. One is the inflation rate. We said 3 to 5. 5 would be pretty punitive, and maybe that's an overcall on our part. And then we also had -- and I think what we said during the Analyst Day is that the impact of that to our original 30% EBITDA target was about 150 bps. And then another 50 bps was what we would anticipate to be FX headwinds. And, I'm not so sure that we've called that correctly either. So, I think, there's a little bit of upside there. And I do think that because we're running -- Joe won't be specific to this audience, I don't think, and maybe I shouldn't be either, but I'm super confident that we're going to exceed the cost synergy target. And, I think, that would be helpful. So your comment about '24 should be better than '23 and '25 better than '24, I think is a reasonable expectation.

Okay. Super helpful. Maybe next just thinking a little bit about the balance sheet. If we look at the 2023 metric, I think it's around 2.7x leverage. When we look at the cash flow, you talk about, it takes you sub-2x, I think, was the goal for '24. Where is the right level longer term? And how do we think about kind of the puts and takes to getting there?

Well, ultimately, I think if Joe were here, he would say we're roughly at that 2.5x, and we should be able to delever by about a half a turn, a year comfortably. Right now, we have an obligation of $206 million on a term A note, 70% of which is fixed. And free cash flow of roughly $400 million, assuming a normal year. So we're in good shape in terms of debt pay down, and we should be able to delever it. And depending on where we're at and what we're spending at the time, I think we would be comfortable certainly with spending more than -- or paying down more than the $206 million per year.

There's been a little bit of conversation about the repurchase authorization you announced a while back relative to that debt paydown. So where we sit today, just a little bit of sense for sort of how you think about potentially putting some of that repo to work first, like you talked about kind of prioritizing the debt paydown instead.

Yes, it's a tough one. I mean, we have the conditions that we're all living through right now. So that has an impact on our thinking. And right now, I would say preferentially, we're looking at debt paydown. We did buy some stock back. I mean -- in fact, we bought some shares at $69, right? So -- and the fact is even at this price or higher, we do the accretion dilution analysis and it says buying back share is likely to be highly accretive. So, I think it's a tough one. I think we'll just evaluate it opportunistically as we see it moving forward. Paying down debt for a couple of years might put us in a position that's slightly different too as well.

Okay. Helpful. And then maybe just lastly on M&A, in terms of the landscape out there. What are you seeing? What are you hearing, when we think about that bump to leverage, if there's a deal? Just give us a sense for kind of what's out there, and how you're thinking about the options that are out there?

It just occurred to me. I should have just brought my M&A funnel and just shared it with the audience. I'm joking, of course. But yes, we have a couple of things, but nothing would be significant enough that we would have to access capital, right? But there are some things that -- I'll be transparent. There are some things that we're looking at that would be logical. But, I don't think any one of them would be difficult to explain to this audience.

Okay. Helpful. And we have just a minute or 2 left. So I guess, maybe I'll just pass it to you, Doug, if you want to give the audience kind of the pitch, or what you're most excited about or what maybe we're misunderstanding the most in terms of the QuidelOrtho story?

Yes, there's just so much opportunity. And I said, during the earnings call that our philosophy is the execution is things done well at speed. In order to attain speed, you've got to focus on the 2 or 3 things that matter and give yourself permission to not do the things that don't matter as much. And for me, in 2023 right now, I'm focused on making sure we're moving things along in terms of R&D for the Sofia platform, more menu. I'm acutely focused on making sure that we have the right leadership and processes in place to improve instrument manufacturing, for the labs business. And obviously, we've been talking about Savanna for so long. I'd love to just get out there and get the thing launched and seeing what we can do. So those 3 things are the things that I think, matter most for the business overall. I would add that bringing together 2 organizations and creating a happy work environment and improving processes and ultimately at the end of the day, improving revenue and margin per head count, is something that we've got to do. I spend a lot of time on the road, talking to employees globally. I do a weekly video, so that people can hear the way I'm thinking about things. And I think, that it's helpful. So yes, I've got my three things, but maybe the most important thing is the people and making sure that as we put these 2 groups of people together that everybody's enjoying it. They're collegial, they're communicative and we're not afraid of change, right? Because as I said during the earnings call, we're a growth company. We don't know how to behave differently, right?

Great. Well, with that, we are at the end of time. We'll head down to Amarante 1 for the breakout. Thank you.