QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. I'm Andrew Cooper, lead diagnostics analyst here at Raymond James. Pleased to be joined by the entire office of the CEO from QuidelOrtho to this morning. A lot going on, plenty to talk about here. So we're going to do a fireside chat. Like I said, the full team, happy to be joined on the stage by Mike Iskra, Interim CEO, Joe Busky, CFO; and Rob Bujarski, COO and President, I believe, now, right, as well as Juliet Cunningham in the audience who leads the IR efforts. Again, going to be a fireside chat. But maybe, Mike, just to start us off, can you take a few minutes, give some background on the company, the areas you play, the markets you play in, how you're positioned? And then some of what's going on maybe over the past couple of years in terms of COVID and all the moving parts there?

Yes, I can take a moment. I can take the whole time if you want. So when you think about our company, QuidelOrtho, what we'd say is we serve the continuum of care. And what I mean by that is from centralized to decentralized. So we do some business in reference labs, regional reference labs. We go all the way through to at home testing. But along that continuum, what I'd emphasize is right there in the middle is probably the hospital business. And if you look at all of our product offerings, almost every single on one of them has a density in a hotspot in that area. So the strength of where we are is in the hospitals, particularly the medium to high-volume hospitals. This, we think, is a good position to be in because as you look at health care, not just United States, but more broadly, more and more, we're seeing that the hospital, hospital systems are responsible for an ever widening part of the care continuum. And they're the primary decision maker. They now own physician groups. They own urgent cares. They have their own retail pharmacies. So they're serving that continuum as well. And so for us, as a -- having density in that area, we have a lot to offer that customer for now and into the future. And that customers evolve, just like our company, they've become a little bit more decentralized. So we like our position there. We like our product offering there, and we want to play from that position. If we think about the last couple of years, COVID's really been a double-edged sword. I mean, a huge opportunity for the combined companies separately and then together, but it's also created a number of challenges that we've had to deal with operationally and serving our customers some challenges that I'm sure we'll get into here a little bit later. But net-net, I think on the bright side, COVID accelerated some trends that are in our favor, like decentralization, like molecular coming to the mid-market where we have a strong presence. And so we think that those are, again, opportunities for us to lean into a bit.

Great. And maybe just kind of keeping it high level here for a moment. You're all a few weeks into some incremental responsibilities. I guess maybe give us a little bit of just how you think about, hey, this is something that we need to make sure we maintain versus these are things that we might be a little -- doing a little bit different than how we thought about them a month ago or 2 months ago.

Yes, I'll start. Look, our first priority, we have a lot of really good things happening in the business. And I think it's important that we recognize we have to make sure we're identifying those things that the opportunities for growth for our company, get the right attention and focus because we need those to keep going. At the same time, we will clearly acknowledge that coming out of Q4 into Q1, there's a lot of effort underway for margin restoration. We've got find a way to change our cost basis in a few areas. We're highlighting a few things. We've got a number of initiatives that we are under an umbrella, some of you may have heard of QO Next. These are our cost improvement areas to fight some of the inflation challenges we've seen. We have other synergy efforts that are underway. And obviously, we've announced that we're taking on a head count reduction. For us, coming in, none of us are flat footed. We know the industry well. We've been working together as a team. I think we have eyes wide open on what the opportunities and the challenges are. What I'd say, if anything, that might be a little bit different is a heavy emphasis on prioritization, making sure that we have the right focus and disciplined approach on execution and making hard choices, but making fast. I'll give you an example of the headcount opportunity. I think we looked at to have completed by the end of Q2. In the last 1.5 weeks, we've accelerated that time line. We've actually -- we've increased the target that we're going to go after. We want to get this done fast for 2 reasons. One, it's going to deliver improvement on financials. But more importantly, it's not good for a company to be in a situation where you have this overhang, right? Right now, 100% of our people are a bit anxious. Less than 10% will be impacted. The faster we take action, everybody will know who that is. We get to the other side and we move on. So just an example maybe on where we're at. And I don't know if Rob or Joe, do you want to add anything?

I think you captured it well, Mike. I think, Andrew, again, we've known the business for a long time. We've been in the business for a long time. So our expectation is that we will -- you will see conviction in our execution, and we'll be very, very focused on 2024.

Perfect. And maybe, Mike, leaning to you a little bit more on this one as well. Just I think back to the very first Ortho earnings call as a public company. And I think the 2 things called out were point of care and molecular. So take the step back, these 2 businesses come together, how excited were you when, hey, I'm going to have some more kind of arrows in the quiver and thinking about those areas? And maybe where are we in terms of kind of really driving that traction today?

Yes. No, it's funny to say that. I remember that time. And we -- for all the reasons we just talked about, what we projected in the market was that the hospital where we were was going to become more influential and we knew we needed to build out the product line. That was the view coming from Ortho. And I actually just the other day, dusted off some strategy slides that I had back from that time, and they're still relevant today. And we -- there's one that has the circles and it says, where are we may be underpenetrated or is an opportunity that is exactly point of care and molecular. So look, we feel really good about the portfolio that we have today. And I would say, look, point of care, strong, strong position in respiratory. In particular, we've done -- last year, again, would highlight our market share gains in flu and RSV. And believe it or not, even COVID, we improved our market share. So we have a strong offering there, and we think that's something to build on as point-of-care growth. Molecular is a little bit of a different story, right? We -- it's an area everyone knows that we're focused on, we're investing in. But the product is just now coming out. We just recently got HSV VZV and we're starting to execute on that. But we still firmly believe that the market opportunity in molecular where we are today, provides a great opportunity. There's some unmet need. We think the competitors are stretching into it that they weren't purpose-built for where we are versus our solution Savanna is made for this market. We score well across ease of use. -- on performance and on cost. We think that our customer doesn't just want one, they want all 3. And so we see that as a huge opportunity. Even that said, what I'd tell you is that's part of the molecular opportunity. We think there's some a little bit above it and some slightly below. So we'll continue to pursue those. But I'll make it absolutely clear, our first priority is to execute on Savanna, get a foothold there and then expand.

Perfect. And maybe I'll just go to Savanna now. Any updates to share today in terms of RVP4 and kind of how you think about the time line for getting that to market and really kind of being able to go pedal to the metal in that portfolio.

Yes. Great question. Look, I think, obviously, RVP4s had a lot of attention. And we've had a lot of conversations today, a lot of questions. I would back up on a couple of things. One, that's one many why don't we need. We actually have other menu items we need. So the folks around Savannah is building out the menu and delivering that. RVP4 Plus for us, our focus right now is primarily on the back end of the year. That's the flu season and the respiratory season we're pretty much coming out of the opportunities to be in place for that by the end of the year. Somebody asked me if I was comfortable with where we are on that. And I will tell them the same thing I told was like, "I won't be comfortable until I see it," right? So let's just be honest about it. We are dealing with some things we don't fully control. But for the things we do control, I would tell you, it's getting a lot of attention, right? All 3 of us and others are heavily focused on it. In doing all we can do to get not just RVP4 out but the other menu items. And that's what we need.

Great. And I want to kind of lean in on that a little bit in terms of the $250 million run rate goal that's been out there before, I guess, maybe first, is it still the goal? Is it still kind of what we should be thinking about and expecting -- maybe I'll pause there, but that's the first question.

That's good. I'm glad I know you have back to back on this question too. So look, $250 million is the goal, and it's out there. What I would honestly say is between when that goal was established and where we are today, the makeup of how we get there changes slightly. And clearly, we are on the time line that we expected. But again, I would say the market opportunity is still there. We actually have some other things that maybe we're a little more excited about today with potentially things we do with the menu like adding syphilis to HSV/VZV, just a huge unmet need right now broader than where we serve, it may, in fact, open up some new doors for us. And so maybe that's an opportunity that we didn't factor in. So net-net, we are driving to that number, but we're watching a lot of things that will factor into it. But nonetheless, whether it's $250 million, $275 million or $245 million, it's a big number. It's a big opportunity, and we still believe it.

And just kind of on that, I think I've asked this question in the past before. But as you think about the bridge to get there and you mentioned the menu what's your vision of what that menu looks like at that point? Is it, hey, we've gotten RVP4, or RVP11 syphilis at it? Is it 5 assays? Is it 7, 10? Like what does it take to get there?

Yes, I think -- and Rob, you can elaborate, but I think if you added STI and GI, then we think we have a big part of what we need. Rob, why don't you.

Yes. Andrew, I would even just -- even just narrowing it to when do we really get a jump start. When do we get a kick start? And as Mike just mentioned, I think the ones that the field, I would say, is most interested. RVP4 with CLIA waiver, right? Without the CLIA waiver, you just don't get to the breadth, you don't get to the breadth of the placement. So that's going to be a key catalyst as well as STI. And those are the first 2, and not get you to the $250 million, but when you start to say, when do we start to get traction? What gets the field very excited. Those are the ones right out of the gate. So when you're thinking about 2024, you're thinking about our focus more so than a revenue number for 2024 or any of that, you got to have them and you really make this platform a success. And those are the ones that we're focused on straightaway.

Okay. Perfect. I guess just kind of zooming out a little bit, but thinking about the business as a whole, Respiratory probably gets a disproportionate amount of discussion, I think, for a good reason. But ultimately, at least as our model sits, it's going to end up less than 20% of kind of where you really land even at the high end of the guide, I think it's about 1/3. So just to make sure we give the Labs business sort of it's due and don't spend all our time on respiratory. I think you'll maybe I'll be happy to do that, right? Back in '22, you called that business a 5% to 6% growth market. Does anything change there? We hear a lot about China. We hear a lot about some different moving parts there. But how do you think about that overall labs business today maybe different or the same versus a few years ago.

Yes, really the same. And so we think that market is 5% to 6%. Just for everybody to back up, for us to grow at that rate means that we're taking share from somebody. And the reason why is that when you look at our labs business, we're probably 65% clinical chemistry, 35% immunoassay. The markets flipped in immunoassays faster growing. Our strategy has been for the last 8 years is to leverage our chemistry and increase our immunoassay through our integrated placements. We expect double-digit growth on integrated. Look, what's really nice for us is we know this model, we can execute against this model, and it's been driving growth that's -- even last year, we would be above those market rates for chemistry and immunoassay -- this year, I think we're at those rates, immunoassays a little stronger for us this year coming up. And so we know how to do that. But I don't see any reason for that to change. In fact, one of the headwinds we had a year ago at this time, we would have said, "Hey, one of our biggest challenges is we're backordered on instruments." It was one of the many supply chain challenges we are facing. But Rob and the ops team did a fantastic job fixing that, and we believe it's fixed, and that's made a difference. And now the ball shifts into the commercial team's hands to go drive that growth. Now China last year, we had some favorable comps, but we still think we're in a good position in China. A question that obviously comes up usually is VBP. VBP for the -- what was done last year is baked into our plan. For this year, it has some impact, but it's not material. And we will have plenty of other opportunities to offset it. So maybe I'll stop there, Joe, and Rob, anything.

The Labs business had a great 2023. It grew high single digit. And even when you exclude the onetime collaboration income, it's still the large single digit. So we had a really good year there. So it's great you brought it up highlight that for us. Thank you.

Absolutely. Maybe to kind of double click on it a little bit and just think about that algorithm. Maybe just remind folks what makes up that if we call it 5% to 6%. How much is price? How much is, hey, we're bringing new menu or new menu to a new geography? And then what's sort of the true sort of same-store dynamic that you expect in a given year?

Do you want to take that first and you [indiscernible]

Yes.

Okay. So look, our model, how we actually go to market and our strategy for our field teams is around retained grow in. And so we believe our growth equation starts with retention. If we can retain at a better rate than our competitors, that's a win already, right? Because it's one -- it's not a hole in the bucket we have to go and sell. So if you think about our business, these customers usually sign 5- to 7-year contracts. You have roughly 16% of the business up every year. How do we secure that sooner. Our tactics around that are to get in, not the year that it's coming to bid, but getting 2 years earlier, try to do extensions and things like that. grow is through new menu additions, probably top of the list for us right now would be things like procalciton and PCT have been a real big driver of same-store incremental growth from new assays selling to current customers. And then the other piece is Win. Win is where we go take business away from our competitors. That's still strong for us. And you'll see that more than anything in our installed base as we talk about some of those numbers and how they show up. Typically, in that business, as with transfusion medicine, we faced probably 1.5% annual price headwind. We believe there are some tactics we can take as well there to maybe try to reduce that going forward. So that's a focus area. It's one of the QO Next initiatives that we're working on. But that's kind of how we look at that business.

Yes. And that price erosion that Mike just mentioned, it's the overall market, not just us. And that's been going on for decades now. So it's nothing new. So when you think about the formula to get there to our 5% to 6%, the volume and new menus got to be more like 6% to 7%. That's a simple formula.

Helpful. And maybe just thinking about kind of leaning into offense a little bit here and we're hoping maybe for an update at an Analyst Day in the spring, I think we might have to wait a little longer unless you want to share today on just how you think about next generation, right? We used to hear a little bit more about dry dry things like that. So what is sort of in the pipeline there? And how do we think about time line for when you need or when you may have that next iteration of sort of labs instruments?

Sure, Rob, I'll kick off and maybe throw it back to you. So yes, I think the right way to think about it is what's the next generation? What is in a couple of things? One, the next generation for us is anything that -- well, it has to strengthen where we are -- our sweet spot. We do also expect there's opportunities to expand our sweet spot push-up market probably a little bit. And one of the things if we go back prior and this will tie into, I think, a question I have later on around done screening, that next-generation product -- what we were trying to do is we were looking at technology that we believe we could apply to the donor screening infectious disease business first, start to generate some revenue and income off that investment faster. And then -- but ideally, it was all meant to go into the ClinLab business. We found that the feasibility to move to ClinLab wasn't there. And so that's what led us to, unfortunately, a hard decision, but I think the right decision to back off that project. There are other technologies that are solutions and things that we've been working on that still fit that next-gen platform, is just slightly on a different time line. And of course, what we've now announced is that we will be winding down the donor screening business. So we won't be starting there in the area. We'll be looking more specifically at the ClinLab market. Yes. And I would say there's more to come later. But Rob, please feel free to build on.

Yes, I think you covered it well. I think the focus for 2024 is really going to be more menu on existing platforms, right? As Mike mentioned, they're absolutely our next-gen solutions going. But when you look at a bucket of R&D spend, the vast majority of that is going to be more many existing platforms.

Great. And you touched on it a little bit there in terms of the donor screening business, I did want to ask about that. Maybe just to level set first, remind us how that transfusion medicine business breaks down between donor screening and immunohematology. And then kind of why donor screening is one that, hey, maybe it's time to take a different -- to exit essentially [indiscernible] immunohematology, where I think you're optimistic that there can be a nice growth profile.

Yes. No, I appreciate the good question coming up because I think it's important to understand. When we say transfusion medicine, there are those 2 businesses. There's immunohematology. If you think about blood banking, testing that's done in the hospital. And then donor screening, what we're talking about here is really a very unique niche market opportunity. Biggest market by far is United States. There's only a handful of customers that actually do this testing. If you think about it, they're really reference I have mega reference labs for blood and/or plasma testing -- that's not like our other customers. And so when I go back to that continuum and where our hotspot is and where we fit. This is a whole different segment. So I think it's important to understand that -- we've had a presence in that business for a long, long time, and we've really, in the United States has been 1 of 2 primary competitors. And for us, now the investment it would take to upgrade our platforms for that business line alone probably isn't worth it. And it's a niche market. It is a smaller market, and we think that investment is better off someplace else. Now what makes our hard decision is one of the reasons that we've done well in that market is customers love us. They love our customer service. You talk about having purpose as a company, not much greater than taking care of the nation's blood supply. And so we -- that's one of the reasons that we've really tried to stay in there because we like that part of our business. We think it matters. But we have to make tough decisions and so we've made that decision, and we'll move forward. So that's donor screening, okay. Why IH? Why stay in IH? Well, let's go back. The customers, if you're in and you say the hospitals are hotspot, and they're really becoming the center of health care, then you look at immunohematologic market leader globally, #1 market share in the United States. As much market share as we have in revenue, what we have more of is a large number of customers buy something from us. It's a reason to go in the door. And as we look to build out our portfolio and our product line, it's a way for our sales teams to get in the door. It's a relationship that's there. We have brand recognition. So there's a lot of things that we can play off of it. That's why we like that business. We think there's growth opportunity as a market leader. And frankly, we think there's some cost down margin improvement efforts that we can apply there as well.

Perfect. And I am going to make us talk about respiratory at least a little bit. So maybe we'll kind of pivot there now. Before we dive into the nitty gritty of the guide, maybe just think about the day versus 2019 pre-pandemic how that site of care, modality of testing and the business has evolved and maybe what that means for Quidel relative to, I think there's a huge number of folks out there that talk about COVID testing and all in a little bit different of a way. So how you think about that?

All right. So I'll maybe start and then when you get to the [indiscernible] questions, I'll hand it over to Joe. So let's talk about the market dynamics. I think first off, we approach it as a respiratory set of products. But even in there, let's break it apart, you have more traditional respiratory like flu, RSV and Strep. We know that's a volatile business anyway, right? It's seasonal and how big it is depends on a lot of things we don't fully control it. What we've worked a lot on is what is our method operationally, how is that tied to our forecast. So I think we've tightened that up quite a bit happy to elaborate on that. But I think we're in a good spot there. COVID is a major swing item, right? And COVID is changing. It's hard to predict -- it's hard to predict when it's going up. It's just as hard to predict as it's coming down. But when we look at it from our point of view, there's 3 main pockets of where we are getting our business. One is government, the second is retail and then the third would be the professional market and all have different drivers and things and government for the most part is winding down. In our retail, still a good amount of volume although it's decreasing, but there's a tremendous amount of price pressure. The last spot is the professional market. And there, we're seeing this to be a little more resilient. And when you look at it, even last year, why didn't our business erode as much. We think this is probably one of the reasons where we are is where people go when they're sick, right? We've seen the behavior change with COVID. But when people go to the doctor, that's where they're going to go. This is antigen testing, more decentralized but professional setting, and it's not sitting next to a molecular box. So the business that was going to be eroded by molecular, we think, has run its course, for the most part. This is more where you've got the Sofia on the desk, and they are doing flu, they're doing RSP, and they're doing Strep. And so of course, they would be doing COVID and combo. That's where we see it now, and that's how we're kind of looking at that segment of the business.

I would just add that if you're going back to 2019, Andrew, the size of the market has greatly expanded due to a combo and COVID only testing, and our market share has gone up dramatically, too. So if you think about '19 to the midpoint of our '24 guidance, our revenue is up almost $400 million.

And there's a lot I could ask there. I'm going to go to one just for the sake of time that I get asked a lot, which is just thinking about the guide. You gave a wide range. You brought the COVID expectation to sort of the low end of where you were prior, which I think makes a lot of sense. But question I get is, you did $54 million or so in 4Q, you guided to $200 million or a little north of for the year. And 4Q typically has some seasonality on COVID. So just help us think about why you're comfortable with that range given kind of what 4Q was.

Well, we're going to say the same thing you go.

Okay. I'll start and you can chime in. So I guess the first thing I'd note is that one of the big learnings over the last year or so is that the COVID revenue is not necessarily so tightly tied to a respiratory season or tied to the variance. And you mentioned Q4 and the revenue we did there, but we did over $80 million of COVID revenue in Q3. So it really depends on when the variance roll out. So we've done a lot of review on this number. We've talked to outside consultants we triangulate it with what others in the space are saying about it. We've talked to our customers and we think this is the right estimate now. But it's obviously clearly something that we're going to keep an eye on. As you think about our respiratory range of the $460 million to $730 million of revenue, this is the one area we're probably going to spend the most time thinking about over the next few months or quarters and whether it's the right number or not. But right now, based on our review, we think it's the right place to be.

Perfect. And now maybe the hard question just on EBITDA. I think the math a lot of people have done is look at 2019 again, as sort of the call point, right? And you had sort of a blended business when you look at the 2, trying to make it apples-to-apples. That was call it, 27-ish percent -- 26%, 27-ish percent EBITDA margins. You guided to 21% to 24%, hoping to get to 27% in 2025, but maybe just help build that bridge from point A to point B and maybe call it 25% point C.

Yes. Let me try to do this as simply as possible without throwing a gazillion numbers at you and get your head spinning. I'll focus on basis point up or down, headwind tailwind. I think that's probably the easiest way to think about it. You start with that 27% -- roughly 27% EBITDA margin in 2019 to the midpoint of our guidance, we're down about 500 basis points. The headwinds are -- first of all, there's a couple, I would call them base adjustments, FX has impacted us about 200 basis points as the dollar has strengthened over the last 5 years and impacted the U.S. business. There's also been about 150 basis impact from stock-based comp, not because it's up that much, but because in 2019, CFOs were more able to add that back to EBITDA, and now it's not as acceptable. So we are no longer adding that back. So that's another, what I would call sort of a base adjustment to that 2019 number. The next 2 items are inflation. And we've talked a lot about this today and over the last month or so. We've seen material inflation in our business. I would say it's more predominantly focused on the ortho business in the areas of these resins and plastics and chips and things like that, that go into a very complex product like a VITROS. That's about 500 basis points of impact. And we've got plans to go get that cost and pull it out as part of the QO Next initiatives that we'll implement or execute, I should say, in 2024 for '25. Next is labor inflation, about another 500 basis impact. And then you've got R&D, we're spending more on R&D. It's about 350 basis points impact when you go from '19 to '24. Those are all the headwinds. The tailwinds, I just mentioned respiratory is up about $400 million. That's about 600 basis points of benefit to our margins from '19 to '24. And then the nonrespiratory business, which we talked about earlier, that's up close to $300 million in revenue in that time period, and that's about 200 basis points of margin tailwind. And then the final piece is going to be the synergy achievement, which largely offsets the labor inflation. It's literally almost the same number. It's about 500 basis points of synergy achievement, which again, largely offsets that labor inflation. And that's how you get to the 20% midpoint of our guidance. Now point C, 3 things. Execute on the head count reductions that we've talked about, execute on the QO Next initiatives that we talked about, and execute on launching Savanna to turn it from dilutive to accretive. Those are really the 3 things.

Perfect. That's super helpful. We're low on time, so maybe I'll skip a little bit to kind of the leverage ratio and cash flow generation. I think one -- again, an area I get a lot of questions is kind of the leverage. I know there's some things you do when you execute the cost savings to make the covenant leverage a little bit different, but maybe just give kind of the high-level view on that.

Yes. So the leverage ratio of the face of the balance sheet at Q4 was 3.2. The leverage ratio per the credit agreement because we're allowed to add back pro forma savings to EBITDA is 2.6. And that's versus a 4x covenant in the credit agreement. That 4x credit agreement covenant stays in the first half of '24, drops to 3.5 in the second half of '24. We feel comfortable with where we are with our guidance and our internal projections that we're going to be fine every quarter. And again, you just remember, you've got the pro forma adjustment that we can add. So the face of the balance sheet leverage ratio is always somewhere between, call it, 0.5 to 0.7 higher than what you calculate for the credit agreement.

Great. Well, we are unfortunately out of time. Like I said, there was a lot to cover, but I appreciate the time, and we'll head down to Amarante 2 for breakout. Thank you.

Thank you.