QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Hi, everyone. Good afternoon. Welcome to the 43rd Annual Growth Stock Conference. Today, we have QuidelOrtho with us. We have CEO, Doug Bryant; and CFO, Joe Busky, and then the audience from investor relation from Bryan Brokmeier. Before sort of breaking into the formal presentation that Doug will give, I am required to tell you that for a full list of research, disclosures and potential conflicts of interests, please see williamblair.com. And following this presentation, we'll be hosting a breakout in [ Jenny B ]. So I'll turn it over to Doug. Doug, thanks for being here.

Thanks, Andrew. All right, good afternoon, everybody. We will be making forward-looking statement, and here's a little bit about supplemental combined financial measures. I'll give you a second to read that. Well, QuidelOrtho is actually the merger of 2 long-standing diagnostic companies, both durable and both having done well for health care for many years. And so combining the 2 companies was something that was natural. We are now just over a year since we closed and as a result now, as you look at it, we're essentially a pretty strong business in 4 large and growing markets. We have 4 businesses, 4 business units, if you will. And I would suggest that we're positioned extremely well in each one of those categories that actually span quite a bit of the diagnostic continuum. We are executing on integration. We are running well ahead of expectations, not only from a revenue synergy perspective, commercial integration, cost synergy, but I would say also culturally and something that we spend a lot of time on and a lot of focus, and I'll cover some of that during the presentation. We have a number of growth drivers. I've said during a recent earnings call or 2 that we're focused in the near term on our Sofia platform, a platform that continues to do well. We've got 87,000 placements now. That's up 2,000 in just the recent quarter. We are in the process of developing more menu for that platform, and we expect to be able to leverage, which a pretty exciting and large asset base for us. We also, at the point of care, in addition to Sofia have the Triage business, about 16,000 analyzers globally. The next biggest thing for us is the high-sensitivity troponin assay, which we are wrapping up the enrollment on the clinical trial, and we fully expect to be in market by the end of 2024. In addition, we have what's called the labs business, which includes both clinical chemistry and immunoassay on the VITROS platform. This is another near-term growth driver. A key to our success recently has been what we've done on the supply chain and operations perspective. It's a bit of a turnaround in terms of instrument manufacturing, and we've brought know-how to that organization. And as a result, as we said, during first quarter, we produced over 400 analyzers. At the end of this month in the second quarter, we will have produced another number of analyzers that should be at least 10% higher than we did last quarter. So I think we're in really good shape to work down the back order, back order of instruments, which is driven largely by continued demand for those products. In fact, I mentioned that last quarter, we were up 11% in terms of orders over the prior year quarter. So in order to continue to sell more products in the market, we realize that we have to improve our level of manufacturing on the instrument side. Equally, we've added recently -- actually went live on May 27 on an additional slide assembly machine in Rochester, New York, the capability of producing another 300 million slides per year. We have another slide assembly machine that will go online in the fourth quarter. And both of these are running ahead of schedule that we had projected previously. So that's another really big driver. And then finally, the one that we talk about, in fact, have talked about in every single meeting today is the launch of Savanna, which we're very close to in the United States. We did launch in Europe in a limited fashion, learned a lot there. We're in a position where we're building inventories of instruments and cartridges in order to support Europe this year, the U.S. beginning in the fourth quarter and then also supplying of cartridges for all of our clinical trial sites for a number of syndromic panels. So those are the 3 near-term drivers. In a later slide, I'll talk about what we're doing after that as well. So we are in really good shape from a financial perspective. I'll save a lot of that for Joe, who will be up here in a minute talking about the financials, but we're in really, really good shape. And you'll see on the next slide that, I think it's a next -- in a slide or 2, a beautiful shot of all of the executive team, never looking better. So we are -- don't want to make a big deal of it. We are now the largest pure-play diagnostic company. And we do span the continuum from the very large reference lab all the way down to the individual physician office with a number of products across the labs business that I was just talking about, transfusion medicine, molecular diagnostics and, of course, the point of care. We have customers in 130 -- more than 130 countries. We have more than 330 products. We have revenues annually at this point of about $3 billion. We're at 28% EBITDA as a percentage of revenue, that's the midpoint of what we had suggested for 2023. We have around 7,000 employees, a total addressable market ex-COVID, actually, of $48 billion and over 120 installed instruments around the globe and really good free cash flow conversion. Yes. We don't look this good in real life, but that's the team. Experience, one way to look at it, seasoned is another. We'll move on from here. Few of those folks on the page there are new to the company, and the other is a really fair mixed group from each side of the 2 organizations. We are in large and growing markets, as I said, ex-COVID, it's about a $48 billion total addressable market. And it's pretty evenly weighted across our businesses, point of care. That market is about $8 billion, clinical chemistry about $9 billion. And when I say $9 billion, it's the $9 billion of the $27 billion, an overall clinical chemistry market. The $9 billion that we're referring to our addressable market is the segment that we focus on and where we compete. Immunoassay, a larger, actually a higher-margin segment of the diagnostic business. Molecular Diagnostics about 9.3% and then transfusion of the group. But in the Immunohematology segment, we are the market leader globally in that category. So overall, a very large opportunity for the company moving forward. We won't read through all this. This is the slide I used to talk usually to audiences about the value of being in diagnostics and the value of investing in diagnostics. There's a number of trends that are helpful to those in our space, but also to us, obviously, as well, the aging population, increase in chronic diseases, I'll point out, and then also the obvious one is the increasing cost of care and diagnostics has the ability to be helpful in terms of reducing the overall cost of health care expense globally. In terms of in-vitro diagnostic trends, I'll just point out 3 quick ones. One, therefore, cost reduction and using your scale to get your cost down is important and will remain important moving forward. Novel markers, particularly those markers that would be monitoring those with chronic disease will be interesting. We focused a lot over the years on molecular solutions to many of these things, but proteomics and identifying not only the proteins, but their impact on disease and monitoring the disease will be increasingly important. And then also, I think everybody in the room would agree that the industry has had during COVID supply chain interruptions. We've all been scrambling around trying to get whatever we need to put together the products that are used throughout the globe. Customer trends, when we look at labs, for example, it's clear that we need to develop products that are simpler, easier to train to in some cases, CLIA waived. In other words, any one of us in the room could do the test without instruction just by reading the cartoon and getting it done. So over time, what you're seeing is companies like ours are constantly trying to develop better ways to get things done easier with less skilled folks in those labs. Now, I'll just stop there. The last -- in the very right-hand side of the slide, we talk about our company itself. In particular, I've got 2 things that I pay attention to. One is drive towards the development of patient-centric diagnostics. I think we would all agree that post COVID, we're all more interested in taking charge of our own health care. And at QuidelOrtho, we are focused on products that will help deliver that over time. And then access to novel markers and technology to improve chronic disease management. Those are particular things that you can expect to hear us talk about over the next couple of years. So arguments can be made whether the -- which direction diagnostic testing is going. Are we moving towards more centralized tests? Or are we moving the opposite direction? We like both arguments. And actually, are poised to meet the challenging -- challenges of an evolving diagnostic landscape. We have products that span the continuum. We also have products in development that either move us left or right. And we think we're really nicely positioned relative to others in our space. I talked about this already, so I won't go on too much, but I would say, in addition to the labs business, which is effectively the VITROS systems, we see that as a reasonable means of growing our top line and our operating margin. And I think the strategies that we've put in place to move to more integrated platforms that combine clinical chemistry, and immunoassay have been effective and will be effective moving forward. So as we grow share, as we grow revenue, we're also growing margin because we're shifting the mix between being so clinical chemistry centric to being more also balanced with immunoassay. Sofia, we've talked about a very large installed base. We're looking at all sorts of menu options, including GI and toxicology. Those are also very large opportunities for us. There are other markers like high-sensitivity troponin and hepatitis B and HbA1c that we think will help drive both immunoassay on Sofia, our Leapfrog technology as well as the VITROS system. And finally, I've already talked today enough of that Savanna. So we spent about $225 million currently in the year in R&D. I think it's appropriate given where we are from a revenue perspective. I think it's fairly nicely allocated across all 4 business units. At meetings like this, we're often asked about what our near-term drivers are -- I talked a little bit about that. But we're equally focused on the longer term. And so I would direct your attention to the right-hand side of the slide, where we show that we're looking at low cost, low volume platforms so that we can move chemistry even further left on that continuum chart that you saw. We're looking at developing another 30 to 35 new immunoassays, which includes some refreshed as well over the next couple of years, having a scalable drive slide and modular next-generation platform. I mentioned toxicology on Sofia. We have an array-based platform called Leapfrog, that brings the sensitivity down by another couple of logs, down to the femtogram per ml level of sensitivity. Why is that important? Because that kind of sensitivity enables low-end precision. So when we show at a very small molecule, a number -- a quantitative result moving one way or another, that actually means something. And in effect, that will enable us to do is move beyond the types of tests that we do currently in immunoassay to more quantitative assays, which greatly expands the size of our market opportunity. New biomarkers, we've got a small group now already working on that. We're looking at wearables with things like chronic kidney disease. We firmly believe that ultimately, over the time, the payers are going to get more involved. I do see a convergence between telehealth, diagnostics and pharmaceuticals. And I see the interested party increasingly become our payers and things that can dramatically slow down disease progression. These markers should be monitored, and we're working at things like that as well. So integration, this is a big thing. I say there's a big difference between integration and transformation, and we have programs in both categories. But in terms of integration, we're doing extremely well. We've completed what we call interim state integration, basically putting the 2 companies together in a way that retains our talented people that keeps all the processes and the business running. That's gone extremely well. We've completed a number of commercial projects with integrating North America, most of Western Europe and China. We have shifted Quidel-branded products from distributor to direct sales in a handful of markets. We've done a lot in terms of people and culture already, including a very nicely a really good response rate to an employee engagement survey. I'll talk about that in a second. And then a number of process and system improvements have already been made. We have a number of other commercial things in play. At the moment, a number of people and culture and other rich HR activities. And then the road map for packaging and labeling product, re-branding is underway. And we've really got over 10 now cross-functional teams continuing to execute a number of activities. And up next, we still have Asia Pacific and Japan to harmonize. We're still working through Latin America and the Middle East. We continue to look at surveying our customers, our employees to ensure that we understand their level of happiness. I would say, on average, we're a pretty happy company, but we're certainly working very hard to make sure that we retain our really good people that they're motivated and they feel like that this is a good place to build their career. We take that very seriously. And then there's a number of IT systems under development. which will be very useful in terms of improving our effectiveness and our productivity. This is my last slide before bringing Joe up to talk about the financials. We did have a high response rate to the employee survey. And as a result, employees don't like it when you do a survey and then you don't do anything about it. So it's really important for us to actually pull out things that we think that we can do to help, and so we've got things to improve and increase the speed with which we make decisions across the company. I'm a firm believer in driving decisions down to the level the lowest level possible and the absence of fear of making a mistake. We say it's okay to make a mistake, just don't do it on purpose. The employees across the globe are more interested in learning and development and figuring out how to improve their effectiveness. Innovation is important factor for us? Job satisfaction is as well, and there were a number of things that told us that we need overall skill building as we work at putting together what I would call a hybrid model. So I'll stop there and just conclude that the merger of the 2 companies is going well. We're very much on track. And in many cases, we're exceeding the expectations that we set for ourselves originally. Joe?

Thanks, Doug. Okay. So the first slide I have is a summary of our Q1 '23 numbers. And the headline here for all of us is we had a good top line, good bottom line, good cash flow quarter, and all key metrics exceeded our expectations. The revenue was highlighted by 7% growth on the non-respiratory bucket, and that was fueled by 11% growth in our labs business unit as well as 20% growth in our China region. Keep in mind, our labs business unit is about 50% of the total business and that China business that grew 20% is about 10% of our total business. We posted $245 million of adjusted EBITDA, which is a 29% margin. And we also posted adjusted EPS of $1.80. So again, just a really, really strong start to our 2023. This slide is a summary of the balance sheet for Q1. And again, the theme here is we continue to have a strong balance sheet. We have over $400 million of cash and cash equivalents on the balance sheet. We generated $157 million of recurring free cash flow, which is 130% of the adjusted net income and 64% of our adjusted EBITDA. And finally, our net debt to adjusted EBITDA leverage ratio is 2.2. So very manageable debt load. Okay. So Doug talked earlier about the integration of the company. And this is a slide that really talks about the business combination cost synergies that we've been talking about since the merger and actually in the S4 quite honestly. We're off to a really good start here. We exited 2022 with $30 million of executed cost synergies. So again, we're ahead of plan. We're obviously going to be ahead of that $30 million that we had planned for ourselves for 2023. And we've actually identified all $90 million of the external cost synergy target. Now keep in mind though, internally, we're running to a much higher -- significantly higher number than that $90 million. So we'll talk more about that over the next few earnings calls. But the $90 million we've identified, and we're running to much more than that. This is our capital deployment priority slide, and we've showed this several times since the merger, and there's no change here. The only thing I would highlight though is that given that we are expecting a fairly choppy second half '23 economic period, we're likely going to put a little more emphasis on debt pay down as we move through the next few quarters. But otherwise, no change here. And then on the couple of slides ago, we talked about the solid start we had to the year given that we did have such a good quarter that exceeded our expectations, we did raise guidance on the Q1 call. Most of the revenue raise was in that non-respiratory revenue bucket, again, mainly driven by the Labs business unit. We also overachieved on the respiratory revenue in Q1, but we didn't raise the guidance, instead, we de-risked the full year guide by taking revenue out of the second half of this year. And then finally, the adjusted EBITDA and EPS numbers went up in proportion to the revenue raise. And then finally, this slide is a summary of the 3-year outlook that we presented back in December at our Analyst Day. And the highlights here are 6% to 9% top line growth, and that's an ex SARS top line growth, 27% to 29% adjusted EBITDA margin. $6 to $7 of adjusted EPS in 2025, and again, continued greater than 100% of net income, free cash flow conversion. So with that, I'll turn the presentation back over to Doug for closing.

All right, I was in the army years ago. And I remember being told keep it simple and repeat the message. So here it goes. We're well positioned in highly competitive and large and growing markets. We're ahead of schedule on integration. We have 3 obvious growth drivers. We're in good shape financially. And finally, we know what to do. So thanks for your attention, appreciate it. Thanks for your interest.

Doug, we've got a couple of minutes left here. Maybe I'll just ask one question and then we can go to the break if that work. But maybe just sort of going back and putting all this together, right, and Joe, I think you talked about it with the LLP, there's 6% to 9% sort of growth here. Can you maybe peel back the onion there a little bit? What drives the 6%? What drives the 9%? How important is Savanna in that range?

Go ahead.

Yes. So the labs business, which is our largest business unit at 50% of the business is expected to grow mid-single digit over that time horizon. Now if we can continue to keep the supply chain in order, continue to run that play that Doug mentioned earlier about leading with the integrated analyzers, there's a potential we could push that growth above mid-single digit there. So that would move you up into that -- the higher end of that range. Point of care, we expect to grow -- point of care is about 25% of our business. We expect that to grow in the mid-single-digit to high single-digit range. And again, there, the variability will be driven by the amount of new markers that we can bring and put on those 87,000 Sofia analyzers around the world. And then the transfusion medicine business, which is also about 20% of the business, we expect to grow low single digits. And then finally, molecular, coming back to Savanna, we do expect to get regulatory clearance in the U.S. on the Savanna product and start placing those boxes as we move into the fourth quarter of this year. We haven't really talked too much about the slope of that revenue ramp in 2024 and 2025. But we have said that we expect 3 years post launch that will be greater than $250 million of revenue on that Savanna product.

Yes. And I would add that you saw on the slide that we think the market is growing overall 5% to 7%. There's also a possibility that of decentralization of testing keeps moving and increasing at the rate it is that these market sizes are actually going to be a little bit larger. And I would point out that the respiratory market in particular, as being you remember, Andrew, when you were first chatting with us years ago that we would say that the flu market was this big, and now it's like this big. And I don't think it's because there's more flu. I just think there's more testing. Okay.

Okay. We'll stop there. We're a couple of minutes early, but we'll head to the breakout here. And that will be [ Jenny B ]. Thank you, everyone.

Thank you.