QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Great. Well, thank you, everybody, for coming today. Welcome to the JPM Healthcare Conference. My name is Casey Woodring. I'm from the Life Science Tools and Diagnostics team here at JPM. Pleased to be joined today by QuidelOrtho. Here with me today, I have CEO, Doug Bryant. So I'll turn it over here to Doug in a minute for the presentation portion, and then we'll get to the Q&A session afterwards. So with that, take it away, Doug.

Thanks, Casey. Good morning, everybody. I'm pleased that we're going to be stuffed in this room. I'm pretty sure prevalence is going up for various respiratory things going around, including whatever I have -- so -- but I'm pleased to be here to talk about QuidelOrtho and talk about our progress. With me here today are Joe Busky, our Chief Financial Officer; Juliet Cunningham, our Head of IR; and other -- and Rob Bujarski, our Chief Operating Officer. We will be making forward-looking statements, and these are our safe harbors. So I've been -- as some of you know, I've been the CEO at Quidel since 2009. And during that time, we've evolved from a small, fairly concentrated diagnostics company into QuidelOrtho, a larger global diagnostic player that serves customers in more than 130 countries. Today, I'll talk about the market opportunity and how we're growing and capturing share in each of our business units. I'll also talk about our R&D efforts that will drive growth, both near and longer term. And then finally, I'll cover our financial results through Q3 and leave you with the reasons why we're excited about our future. I've said before that Quidel's strategic intent, in fact I've said it for many years, was to build a broader-based diagnostic company with scale and with critical mass, and we've done that. Our company provides a broad, highly diversified portfolio of more than 550 different assays on multiple platforms in 4 business units: labs, transfusion medicine, point of care and molecular. We're headquartered in San Diego with roughly 7,000 employees serving customers across the globe. Based on our 2023 guidance, which we provided last August, we expect total 2023 revenue to be in the $2.9 billion to $3.0 billion range. Excluding respiratory-related revenue, we expect total revenue to be roughly $2.3 billion. Importantly, in the first 9 months of 2023, total company recurring revenue was 82%. Instrument placements drive product pull-through, and we have a strong recurring revenue model. New product launches and continuous menu expansion enabled us to grow above market and compete head-to-head with much larger companies. Of a $48 billion addressable TAM, our products target an opportunity of about $19 billion shown here by both disease state in the middle and then by instrument platform on the right. We're -- Yes. This chart actually shows the diagnostic health care continuum from left to right, from the most centralized to the most decentralized segment of the market, from furthest from the patient to closest to the patient, from the slowest turnaround time in terms of result back to physician and patient to the fastest, from the most efficient from a testing perspective to the most effective from the perspective of the physician and the patient. We are well positioned in both reference labs and hospital settings as well as decentralized settings, such as physician office labs, clinics, the retail segment and at-home settings. Our solutions cover the continuum of diagnostic care where and when they're needed. Our business units have been designed to meet and anticipate the needs across the continuum, offering synergies, efficiencies and capabilities that place us in a position to quickly seize and deliver on opportunities in real time. This illustrates the reason we chose to combine Quidel and Ortho Clinical Diagnostics to create global scale and capitalize on multiple cross-selling opportunities with a strong commercial team of approximately 3,000 people globally. We're just getting started. We intend to participate in the fastest-growing, most profitable diagnostic markets around the world. And again, this is the principal reason we put the 2 companies together. Both companies saw the need to play meaningfully in the molecular diagnostic space. We've developed Savanna and launched the product and can now jointly leverage our global footprint, both from a commercial perspective, of course, but also through the systems and processes that we need to manage a broader-based business across the globe. Since we combined the 2 companies in mid-2022, we've been aggressively focused on returning -- excuse me, reducing complexity in the business, enhancing our culture, improving capital allocation and portfolio management. We're increasing our synergy targets. And that, I think, demonstrates that the integration of the 2 companies is going very well. We're moving along nicely, and we think there is even more improvement to be had by year-end 2025. And we'll describe in more detail our plans and our projections for the third bucket on the right at our Investor Day in March. So we clearly believe there's a lot more than $130 million, and we'll describe that to you in some detail shortly. We remain focused on creating volume and prioritizing initiatives that can help drive incremental growth, increase efficiency and improve profitability. We have several initiatives, several work streams that we're committed to, and we've engaged a significant percentage of our employee base and chasing after these initiatives. Those are in commercial, which are focused on maximizing our global presence and taking advantage of many cross-selling opportunities available to us. We are keenly focused on executing our Savanna launch, of course, in the United States. I'll talk a little bit more about that in a second, which is a really large growth opportunity for us, but there are other cross-selling opportunities as well. In operations, we're improving things in supply chain, procurement and optimizing manufacturing and finance. We're focused on improving free cash flow and consolidating systems and processes for greater efficiency. And in R&D, that's more about prioritizing and executing the development projects that will drive growth in the next year as well as longer term into the next decade. And then finally, culture, which I believe is probably equally important, bringing our people together and putting their talents to work on roles that are best suited for them and their career growth objectives and their aspirations. So we've got a plan, and we've got a great team with a track record of getting things done. So now we're going to move and talk about each of the business units. We're focused on some of the faster growing and more profitable of the diagnostic market segments. Moving forward, we see real opportunities in molecular diagnostics, of course, in particular for infectious disease testing and diagnosis closer to the patient. And in addition, I would say, medium term, highly-sensitive immunoassay to detect proteins that have thus far been a challenge for laboratorians over the years. Our labs business, our largest revenue business has had a great year, growing high-single digits in the first 9 months of 2023. We've successfully worked through a large instrument and reagent backlog to return to normalized levels in Q3 '23. We've integrated a lot of the business, and that strategy is paying off. We now have an installed base in terms of the integrated strategy, and particularly, that's the combination of immunoassay and clinical chemistry. We now have 4,500 fully-integrated analyzers and with very high recurring revenue. 40% to 45% of the placements are with new customers, which I think portends well for that business. The transfusion medicine business is a business with a rich 80-year history. Ortho is the brand name in transfusion. Our immunohematology business is a recognized global brand leader with a growing automated installed base of about 6,800 analyzers. Immunohematology is a solid business that has the potential to grow from the low-single digits to the mid- to high-single digits with a reasonably modest investment in a higher volume next-gen platform. The point of care business -- our point of care business rather has made us the #1 leader in respiratory testing, gaining share from much larger companies, and we've been doing that for several years now. I want to spend a couple of minutes, and I've actually got an actual chart that was prepared by a third party. It's the same third party we've used for years. And it may not be precise, but it's consistent because we're using the same party. So when you look from year-to-year, you can see are we gaining directionally. So while the specific numbers to the tenth of a percent may not be exact or we could see a little bit of variability there, the direction is certainly accurate. So I'd like to comment on a couple of things. One, the flu space, which is now for us, flu stand-alone and flu with COVID. I'll comment on the U.S. market for that being the largest market there. And then I'll also talk about RSV. Years past, I haven't spent a lot of time talking about RSV, but I think you've seen it in the news, and it's -- the market is up 39% year-over-year. So I'll talk about that as well. But if you look at it in terms of a unit market share. First, if you compare October 2022 trailing 12 and more recently, October 2023 trailing 12, you see that the total unit market size in the Professional segment in the U.S. market has gone from roughly 50 million tests per year to 57 million. So clearly, post COVID pandemic, the market for respiratory testing continues to grow. And in that period of time, we've increased our market share by 2.7%, from roughly 38% to roughly 41%. And our next nearest competitor in that -- in terms of unit market share is at 16%. So significant difference between us and the next competitor. That wasn't true a few years ago, pre-COVID, for those of you who have been following us for a while, we were pretty close with another competitor that started with the B, okay? And that the competitor interestingly, in the year-over-year comparison, we went up 2.7%, and they went down 2.7%. So that's flew and what I would say also worth noting in the charts because we look at it by segment, by physician office segment and then we also look at it in terms of the acute setting. The physician office setting is growing faster than the hospital setting. So fairly significantly. So -- and so the largest part of the market now for respiratory disease testing. That sounded like RSV, didn't it? Actually, RSV is a deeper -- so when you're on the plane, you hear that guy behind you with a really low cough, that's probably RSV. So just take that, so where was I anyway. So what I'm suggesting is that we've always said that we thought that for certain things, we're testing closer to the patient made sense that we would see an increase in that decentralization, and we're certainly seeing that in respiratory disease testing. Now for RSV, I'm proud to tell you for the first time at this conference that we are now the market leader in RSV testing. We've surpassed the company that starts with an A. And -- but we both dominate the space, to be fair. Our market share right now, I'm showing is at 46%, and they are at 38%, so pretty close. So those 2 companies pretty much are RSV in terms of unit market. We are up 5.5% in terms of market share this year over last, and the market year-over-year, same trailing 12 data up, as I said, 39%. Some other facts about point of care. We have 88,000 Sofias on the ground. I've been asked, are you still growing placements? Yes, we are. Through the first 9 months, we placed an additional 3,900 analyzers in the United States. And of those 48% were brand-new customers, right? So we continue to do well in this space. I don't want to sound arrogant. I -- but I do want to point out that we do pretty well in this space. So -- and it's our highest market share category. It's our highest margin category as well. And right now, the split is roughly 49% in terms of the number of analyzers and -- in the physician offices. And 51% are in the hospitals. The hospitals just have more on the bench because of the volumes at those sites. And I'm often asked this, how many of your customers are just running COVID-19? And it's about 5% of the placements, just run COVID still. And then moving to Triage, another important platform for us. We've got about 16,000 analyzers on the ground and the business is roughly about a $200 million business. So -- and that's significant relative to our total, but we do expect quite a bit of growth in the category, expansion across geographies. Cross-selling has been an important lever. And we anxiously await a couple of different assays. We're launching of course High Sense troponin outside of the U.S. It's doing -- it's doing fine. But the real opportunity is High Sense troponin in the U.S. and we expect to get there some time by the end of this year. Okay. That's probably my longest slide. You can tell I enjoy talking about point of care. Molecular though is small for us right now, but it's likely the largest opportunity for growth that we have in front of us. The Savanna approval recently with the HSV VZV panel has enabled us to immediately place boxes. We have inventory of instruments. And in fact, we took our first few customer orders within hours of an all-hands sales meeting -- all hand sales call on the day after the FDA clearance. So we immediately took orders. We already shipped boxes. And what's important there, I think, is even though HSV is a smaller market, it's what we call a gatekeeper assay. And it enables people, enables us to get in the door and to place analyzers quickly. And then those same sites as soon as RVP4 is cleared, we expect that to dramatically accelerate the placement, right? And I'll give you 1 example without naming the customer, if that's okay. So we closed a very, very large urgent care system, and we shipped them to HSV -- I'm sorry, to Savannas to do HSV/VZV. It's clearly not a test that needs to be done in all 67 of their sites. But you can imagine that I'll be shipping 65 more shortly as soon as RVP4 is cleared. So the HSV doesn't seem like it's an important launch but it truly is being in market, placing analyzers, getting things going, having the instrument validated here over the next several weeks is super important for us. So obviously, we're excited about the U.S. launch of Savanna. But this is 1 product initiative in an overall larger molecular strategy that we will now describe in further detail at that same Investor Day that I talked about that we're going to have in March. And turning now to R&D. I don't know if that's 1 of our scientists, but he does look like a scientist. I'll be brief here. I think we can talk more during Q&A, if you like, about the attributes of Savanna, but we already have evidence both in Europe and ex U.S. and now in the United States that we're going to be extremely competitive. So I would just say, stay tuned. I created this slide because I've been asked, why do you think 1,000 placements of Savanna in 2024 is the right number. And the truth is it's probably not the right number. It's close to what we think based on a bottoms-up forecast of what's happening in the United States. And it includes basically HSV/VZV, and includes RVP 4. It doesn't include if we launch STIs or pharyngitis or any of the other assays that we have pending clinical trials. And I've been asked, though, when you look and you compare with other folks' launch and you can probably in the middle of this chart, you can see who I'm talking about. But there was an analyzer launched in 2006 roughly. And that company only placed 450 analyzers. So people are saying, "Well, how could you be twice as successful as that company. And my response is -- that's 2006. This is not your grandfather's PCR, and it's not your grandfather's molecular market either, right? The demand for decentralized molecular diagnostic testing for appropriately sized panel near the patient has increased dramatically, right? We're simply serving a market that has been waiting for something that could decentralize molecular testing. In 2006, molecular testing included -- was basically performed in the reference labs. As we continue to innovate and significantly differentiate ourselves in the market, we are focused on developing those assays and panels that address clinical -- clinically unmet needs. Now I'll go over the financial results. Again, I don't know if that's 1 of our finance people, Joe, but they look like they could be in finance. We reported solid Q3 numbers. Q3 year-to-date results were $2.3 billion in total reported revenue. Adjusted EBITDA was $528 million and adjusted EPS was $2.96. During the 9 months of 2023, we generated $180 million in adjusted free cash flow and ended the period with $205 million in cash and marketable securities. Mid-single-digit revenue growth driven by continued execution in existing markets and also including new launches will be aided by margin expansion from deal synergies, higher margin product availability and fixed cost absorption. Our long-range plan of 6% to 9% growth remains unchanged. As we look at our capital allocation strategy, our primary objectives are to support our growth with capital investments in R&D and put our cash and balance sheet to work with the balance of paying down debt and share repurchases. And I'm sure I'll get a question on this, but we're trying to be opportunistic when we think about those 2 things. And we also are making significant investments in infrastructure in order to manufacture products, et cetera, of course. We do want to be positioned to be opportunistic with tuck-in M&A that can accelerate our growth, increase our market share or provide entry into adjacent market segments as well. And we'll talk a little bit more about that at the Investor Day and what we've been working on there. And so finally, I've talked about our primary growth drivers. They're important enough, though, to repeat, perhaps with a different set of words. First, QuidelOrtho is a stable, diversified growth company. We have a strong, resilient and proven foundation that can flex to the changing needs of our customers and the healthcare industry. And through our integration and transformation initiatives, we continue to improve our efficiency, grow our EBITDA and generate cash to invest in our future and create value for shareholders. We're keenly focused on execution. We will execute our near-term path forward with remarkable speed and excellence. I often say that execution is a function of things done well. Most people understand what things done well looks like. But with speed in order to achieve speed we have to focus. We have to pick the 2 or 3 things that are going to matter, get those things done. And we are -- we are moving our culture in that direction, such that all 7,000 of us think that way. And we intend to realize our future potential by investing in our future, creating strong competitive differentiators and ultimately helping shape our industry.

That was great overview. Thank you. Yes. So now we're going to start the Q&A portion of the session. We do have a mic runner in the room if anybody in the room has questions, and then if you're sitting on the webcast, please feel free to send me a question via e-mail or use the webcast function. But maybe before we dig into things, Doug, just quite all normally preannounces at our conference or at least has the last few years. We didn't get 1 this time. So just what went into that decision this year to change things up? And then maybe while we're on the topic of 4Q. Any commentary you can provide on trends exiting the year from either a revenue or margin perspective? And any color on some of the variables that would have impacted the quarter like respiratory distributor buying or anything else?

Yes, that's quite a question. Let me start by saying we historically have preannounced when we have something that's materially different than you think. So both positive and negative. One of my first things that I did in 2010 was announced -- preannounced that we had missed the quarter dramatically. So we will always endeavor to preannounce when we think it makes sense. And obviously, Savanna was an important enough thing to preannounce, but we had already announced that a few -- a week or so ago. So we didn't actually see a need to do that, and we'll have plenty to talk about at the earnings call here in a few weeks.

Got it. So you're guiding to 6% to 9% top line growth ex COVID over the longer term. Just want to clarify, since you've been splitting out kind of ex respiratory the last couple of quarters, is that 6% to 9% now ex respiratory? And then will you kind of continue to split out respiratory.

No, that's total and those same ranges that we had described, both at our -- excuse me, our Analyst Day, Investor Day, the last 1, they still haven't changed and we've been pretty much been -- we have been in those ranges. A couple of things have caused that to be different. For example, we said $200 million to $400 million on COVID. And -- but we didn't anticipate we were going to get that big government order in the first quarter. So we'll be higher than the range there. On the flu, we've said $230 million to $270 million. We're still in that range. And then we had a bucket called other, which includes Strep, RSV and others. And $85 million to $115-ish million, okay. See, this is what CFOs do. They lower the higher end of the range. But yes, so we're in the range there on those two.

Got it. That's helpful. Just is that long-term guide applicable to 2024, you think? And then maybe can you just walk through the variables on the non-COVID side that would swing revenue above or below kind of that target?

I think we're very much on track for 2024. The variables are how well we do with the Savanna launch, of course, how well we do in Q1 continued with the respiratory season. I think there's reason to believe that we are in a respiratory season. We're seeing it in the news, but I also see it in our data. We could have told you a while back that the RSV was going to be a problem. We were running at 24.5% positivity on those test run Sofias fairly early on, and it hasn't subsided. My mom has it. I have a grandchild with it. So that's 2 cases. But it's around -- it's surprising though. It's surprising, to be honest, because typically what happens with RSVs, we see it start earlier than the rest of respiratory pathogens, and we see it peak and usually start to subside in December, and we're not seeing that at this point. So I think Q1 looks like a normal respiratory season in a larger respiratory market with larger share on our part.

That's helpful. Maybe stepping back and just some more color on those long-term targets. Labs has historically been a mid-single-digit grower, TM, low to mid-single. So you help us bridge to get to 6% to 9%? Is that going to be majority point of care? Is that a lot of that Savanna just to grow above mid-singles there. Can you just maybe walk us through that?

Well, our largest business is the labs business. It's clinical chemistry and immunoassay, we do really well in a -- we have a sweet spot with customers a certain size. We are placing analyzers. We are taking share, we are growing faster than the market. The thing that has occurred that has improved that is our manufacturing. We've dramatically reduced the number of instruments on back order. We've dramatically reduced the number of back orders for key reagent products. And so we're already reporting numbers for lapse that is probably higher than most people are thinking. So I think we were at 9% through Q3 and I think I'm pretty sure I said during the Q3 earnings call that we expected China to be back on track, and they are. And so labs is an important piece of it, augmented by what we're doing there. And then, of course, it's early with Savanna, but we do expect quite a bit of lift there. So I'm pretty comfortable that -- that we're not -- as they say, we're not over our skis here. I think we're in the right range.

Okay. I'll open it up now if anybody has any questions in the room?

On your slides you mentioned improving cash conversion and just wanted to get an update on that. I know 2023, it was going -- is expected to be at the lower end of where you expect to normally land. Can you talk about the trajectory going forward?

We are already seeing evidence that the things that Joe is working on are generating better free cash flow. We actually saw it in Q3, not ready to report how we did in Q4, but we've made some changes with respect to accounts receivable and accounts payable. Those will take some time but we're already seeing evidence of improving free cash flow. And I probably shouldn't go into significant detail, but it has mainly to do with how we procure things and how we pay for them. Yes.