QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

All right. Great. Well, thank you, everybody, for coming today. Welcome to the JPMorgan Healthcare Conference. My name is Casey Woodring. I'm from the Life Science Tools and Diagnostics team here at JPM. Pleased to be joined here by QuidelOrtho. With me today, we have CEO, Brian Blaser; CFO, Joe Busky; and Head of IR, Juliet Cunningham. So I'll turn it over here to Brian first for the presentation portion, and then we can get into the Q&A session afterwards. So with that, take it away, Brian.

All right. Good morning, everyone, and thank you for getting up early with us here first thing this morning. I know security is tight here today. Joe and Juliet are my security detail. So be careful, they'll tackle you if you ask a tough question. So -- very pleased to be with you here today. I'd like to go ahead and start out by describing our business, taking you through some of our market opportunities, how we're positioned to grow and capture share in each of our business units. And then I'd like to cover the initiatives that we're deploying and how we see the business evolving over the next few years. But before we do that, I would point out that we will be making forward-looking statements during the presentation, and we will refer to non-GAAP financial measures. Please refer to the description of these financial measures and statements in the presentation, including factors that could cause materially different outcomes. So as you know, Quidel and Ortho Clinical Diagnostics combined in May 2022 to create QuidelOrtho. And today, we are focused around 4 major business areas that serve market segments of roughly $20 billion: labs, transfusion medicine, point of care and molecular diagnostics. Our global product portfolio includes more than 330 products. Today, we announced preliminary full year 2024 reported revenue of approximately $2.78 billion. 2024 was an important year for QuidelOrtho, where we made several changes that will position us for near- and long-term growth. So we are a global company with approximately 6,600 employees. We have 3 commercial regions that cover over 130 countries. North America is our largest market with 58% of our revenue; EMEA and Latin America, 20%; and Japan, Asia Pacific and China represent 21% of our revenue; and China alone represents roughly 11% of our total company revenues. Our commercial team includes nearly 3,000 customer-facing sales and service professionals who serve 65,000 customers. Our global regions are fully aligned with our business units to leverage the scale of our global commercial team, capitalize on growth opportunities and provide the best possible customer experience. So a key priority for me as I've come on board, has been strengthening our leadership team and aligning our organization for speed and effectiveness. Last fall, we announced a change in the organization model that enables a flatter more efficient organization that is focused on our key customer segments and regions. We've acquired key talent and assembled a team of highly experienced industry leaders to deliver an excellent customer experience, improve our performance and prioritize profitable growth. Our CFO, Joe has a strong background in diagnostics, including at Dade Behring and at Ortho Clinical Diagnostics. Joe's Focus is on improving our financial performance, consolidating our ERP systems, increasing cash flow generation and reducing our debt leverage. Jonathan Siegrist recently joined us as EVP of R&D and CTO with a proven 15-year track record in molecular diagnostics and biomedical engineering. We're looking to Jonathan's extensive experience in assay development and molecular diagnostics to be a catalyst to improving the capability and productivity of our R&D team. Lee Bowman brings over 25 years of experience in developing talent and high-performing teams, and is a key partner for me and the leadership team as we create a winning organization with a continuous improvement culture that people want to be a part of. And Michelle Hodges is our Chief Legal Officer. Michelle has extensive experience from her prior roles in private practice and has been a key asset for the business and overseeing our legal, compliance and governance matters. [Audio Gap] and excellent customer service. Our commercial emphasis here has been on placing integrated analyzers that can do both routine clinical chemistry and immunoassay testing, only about 30% of our installed base is integrated. So we've got a long runway for growth in this area. The Labs business is a stable, consistent mid-single-digit growth business that represented roughly $1.1 billion of revenue for the first 9 months of 2024. Our Transfusion Medicine business consists of immunohematology and donor screening. We have the #1 brand in immunohematology with an extensive installed base of about 74 systems running more than 350 unique tests and hospitals and blood banks worldwide. We've announced that we are winding down the U.S. donor screening business, which we expect to be largely completed by the end of this year. And excluding donor screening, the immunohematology business generated $386 million in revenue for the first 9 months of 2024. We expect this business to grow in the low single digits in the near and medium term, while there are some opportunities for us to increase this growth rate over time with investment in platforms. We are the leader in respiratory testing in the U.S. with our Sofia 2 platforms in the professional setting with cumulative placements of 97,000 instruments. Sofia 2 is a portable benchtop analyzer designed to deliver rapid, accurate results to physicians' offices, labs and clinics for a range of infectious diseases and chronic health conditions. In addition, we have QuickVue, which is a line of rapid tests for both professional and home use. And we continue to get good traction with our Sofia Flu and COVID combo test. Over the past 2 years, this test has consistently represented over 50% of our total flu revenue. And our Triage MeterPro platform offers an extensive cardiac assay menu that's primarily used in emergency departments for patients presenting with cardiac symptoms. Point of Care contributed $509 million in revenue for the first 9 months of 2024 and is expected to grow in the mid-single digits overall. We are developing an emerging molecular diagnostics business to target the fastest growing market segment in the IVD space. Our benchtop molecular systems provide easy-to-use affordable solutions with highly accurate fast results. Our next-generation Savanna platforms -- platform provides multiplex real-time PCR testing with an easy-to-use sample to result operation. The Savanna instrument is designed to provide an alternative to mainframe molecular systems for use in emergency departments and ICUs, while also providing capacity overflow solutions for core laboratories. Savanna is approved in Europe and in the U.S. In the U.S., we have the HSV panel approved, and we have now entered clinical trials with our respiratory panel. Molecular Diagnostics was $17 million in revenue for the first 9 months of 2024, and we see molecular as our largest near-term opportunity for incremental growth over the next few years. So now that we have covered kind of who we are and how we're positioned, I'd like to shift to the bigger picture opportunity here that we have to improve our operational and financial performance. So one of the things that I've come to appreciate about the company coming on board here that I think is generally not well understood is the -- just the underlying strength and the durability of this business, which is driven by our instrument and reagent pull-through business model. Our business benefits from an extensive base of installed instruments that are deployed globally in both centralized and decentralized settings. The segments that we operate in are large and growing. We have a strong brand with a very loyal customer base with long-term contracts and even longer customer relationships. And our solutions provide important benefits in terms of reliability, accuracy, speed and total cost of ownership that our customers appreciate and value. So these benefits provide us with a strong underlying recurring revenue stream that's characterized by durable mid-single growth. Approximately 90% of our revenues come from consumables. We have customer renewal rates on existing business in the high 90% range and a positive win ratio on new business. So you can see just how strong the underlying business model is here. In recent years, our profitability has been challenged due to supply chain issues, inflationary pressures and the integration of the combined business. We have taken very aggressive action to address this. And as I have come on board, we have refocused the company on a narrow set of high-impact priorities to improve profitability, deliver on short-term innovation opportunities and prioritize profitable growth. We are also realigning our incentive systems to drive improvement in economic profit and return on invested capital. And we are just laser-focused on optimizing our relationships with customers to deliver an exceptional experience and on fostering an improvement -- continuous improvement culture. As we move our business forward, we have three central priorities. The first being delivering an exceptional experience for our customers, prioritizing execution on a small number of high-impact programs and driving sustainable growth. I'm going to take a few minutes on each one of these. First, we have a great brand, which is built on highly reliable systems and an exceptional level of customer service. And I would say, historically, this has been a key differentiator for us. But quite frankly, during the pandemic, this took a bit of a hit as we experienced some challenging supply and quality issues. So we have stepped back and redoubled our efforts here have taken steps to align the entire organization around operating at the highest levels of quality, improving our supply and quality management capabilities and creating a continuous improvement culture across the organization. Second, we are centering our team around a narrow set of innovation and cost structure improvement initiatives that will have the highest impact to the business in the short-term. This includes the launch of Savanna, improving our R&D productivity and the competitiveness of our assay menus on key platforms as well as delivering on key cost reduction initiatives that will return our margins to benchmark levels. And lastly, we are prioritizing profitable growth by aligning our energy and resources to the fastest growing and most attractive segments, where we have competitive differentiation. In addition to driving growth and improved EBITDA margins, we are also focused on improving ROIC, and we're aligning our internal incentive programs accordingly. I would say these efforts are already paying off. We've identified over $100 million of savings in 2024. We are aggressively pursuing additional opportunities across every corner of this business. And I would say that while much of our savings in 2024 was focused on staffing reductions. We are now looking at deeper improvements in indirect and direct procurement, supply chain, manufacturing, quality and IT. And we expect these initiatives to enable us to operate more effectively and to deliver incremental margin contribution in 2025 and beyond. So today, we announced preliminary unaudited fourth quarter 2024 revenue, which was in line with our prior guidance and expectations. During 2024, we made significant progress toward achieving our goal of strengthening our organization and improving our overall performance, both from a financial and an operations perspective, and we look forward to providing greater detail along with our 2025 financial guidance when we release our Q4 and full year 2024 financial results on February 12. Turning now to the balance sheet and cash flow generation. We are prioritizing return on invested capital; cash generation and debt pay down in 2025. Our goal is to bring our net leverage ratio down to a range of 2.5 to 3.5x over roughly the same time horizon as our margin expansion goal. Our capital allocation priorities remain unchanged from 2024. We continue to prioritize the needs of the business first, including menu expansion, the U.S. launch of Savanna, Respiratory and other panels, and enhancing our overall company productivity and efficiency, particularly in R&D. Well, next, we are focusing on cash generation and reducing our debt leverage in 2025, as I mentioned. And we do have some final integration work to complete, including the consolidation of our ERP systems and our IT infrastructure, and this work will largely be completed by the end of 2025. We expect to report 2024 financial results in line with the midpoint of our 2024 guidance of approximately 19.5% adjusted EBITDA margin. And based on our experience and my experience with other companies in our industry, a range of in the mid- to high 20s, adjusted EBITDA margin is a reasonable benchmark for this business. I see and have seen nothing in the structural underlying nature of this business that would prevent us from achieving these levels of profitability. It is going to take some time though as we continue our cost savings initiatives and work through the indirect and direct procurement efforts. Beyond that the successful ramp-up of Savanna and the expansion of its menu will also contribute to higher margins. And I'm not expecting this to be a linear journey, but we do expect to achieve at least 100 to 200 basis points of progress toward this goal in 2025. I'll just close by saying QuidelOrtho is an exciting company with significant opportunities ahead. We believe we -- our value proposition is strong. Our underlying business is stable. And we see a clear pathway to our adjusted EBITDA margin expansion goal in the mid- to high 20% range over the next 2 to 3 years. And so I look forward to updating all of you on our progress over the coming quarters. And with that, I'll close, and I think we'll be happy to take some questions, Casey.

Great. That was a great overview. Maybe just to start on the 4Q numbers that you gave us this morning, the preliminary numbers, the 4Q revenue of $702 million to $777 million, sorry. You talked about nonrespiratory of $561 million to $563 million and respiratory of $141 million to $143 million. Can you just walk us through the drivers of those 4Q revenue numbers and some detail around how the different segments performed. I think you noted in the press release that Labs growth was in line with expectations. And then maybe just any color on how the Respiratory season tracked versus expectations? And any detail on what flu or COVID contribution was?

Sure. Yes, there's a lot there. But first, I'll point out that we're still closing our books. These are preliminary results. They're unaudited. Our results did come in line with our expectations. So the -- our underlying Labs business was in the mid-single-digit range. Our immunohematology business in the low single digit. We did foretell a decline in the Respiratory revenue, which I think turned out to be the case going into the end of the year. But the underlying business performed the way we expected. And at this point, again, with the caveats around the financials, we would expect the rest of our results to come in line with our guidance.

Okay. Fair enough. Maybe just taking a step back, Brian, you've been the CEO for a few quarters now. Can you just reflect on the progress made so far? And what you believe your key initiatives to be over the next 12 to 18 months?

Yes. I think we've -- the team has made a significant amount of progress. We took out $100 million of annual savings out of the cost structure. We have brought in new talent and realigned the organization to be flat or more streamlined, more customer focused. We brought in a couple of new board members, and we've really made, I think, significant progress in the work we need to do in the procurement space, both around direct and indirect spending, and we'll be providing more visibility on this as we move forward in subsequently quarters. Still have a tremendous amount of work to do. We made good progress with Savanna here now entering clinical trials with our respiratory product there. So a lot of work accomplished, a lot of work to do, but I think we're on a nice trajectory here as we move forward.

Okay. Shifting to 2025. For top line growth, you directionally pointed the street to mid-single digits next year or this year, ex COVID government contract and U.S. donor screening. What's your level of visibility into that growth assumption? It seems like Respiratory could be the key variable there. So just any color on what you're assuming for the different -- for Respiratory specifically and some of the different business segments there in '25?

Yes. We provided, as you know, some sort of breadcrumbs to point the way for 2025. We see the Labs business at solid mid-single IH underlying low single-digit growth. The respiratory season we see as kind of similar to prior years, maybe the -- the biggest thing is that our SARS number will probably be lower just because we have a government contract that's not renewing. But other than that, we see it similar. You asked earlier about the respiratory season. We have seemed to see kind of a later ramp-up in the respiratory season this year, which affected 2024 a little bit. But I don't know that the underlying strength is different. We've seen quite a significant ramp here after a bit of a delay. So we don't -- I'm not expecting anything other than kind of the average flu respiratory season for the business at this point. So we'll provide more detail on our call on February 12, about 2025.

Okay. Helpful. And then just on the bottom line, the 100 to 200 basis points of adjusted EBITDA margin expansion target for '25. Curious where that expansion is coming from in your view? And what could potentially drive upside? During the 3Q call, you talked about embedding several cost outs that have not yet been communicated. You talked about some initiatives here today. So just curious on how material some of those will be. And if you can elaborate any of that?

Yes. So in 2024, most of our cost reduction that we made was focused on staffing. We've reduced our staffing about 9%, which annualized out in the low teens really in terms of overall cost out just because of the nature of the positions that we were taking out of the business. We will certainly be doing more of that really is an ongoing focus to improve the productivity of our organization. But I think we're going to be turning to deeper areas of cost in the direct materials area, in the indirect materials area really across every aspect of the business, whether it's travel and entertainment or contracted services or regulatory expense or R&D expense generally. You can go through our entire P&L, and we're looking at every aspect of it and what we can do to improve our cost structure there. Some of our direct material savings will take a little longer to -- for us to realize just because they impact the products that we manufacture and, in some cases, require regulatory work to complete, but those will be the next level that we attack. And I would also say that Savanna -- as we launched Savanna and grow that business, that becomes accretive to the business over time and a less of a drag in terms of R&D expenditure and that sort of thing.

Yes. Maybe as a follow-up to that, looking further down the line, what gives you confidence in that 2- to 3-year timeline for when you would expect to see adjusted EBITDA margins return to that stated range of mid- to high-20%?

Yes. I just look at the types of things that we're going after and the nature of these costs. And just my experience and being down this road before a number of different times. I have confidence based on the cost structure, the fact that there isn't really anything in the underlying structure of the business that should prevent us from doing that, and looking forward to what we're going to be able to do with Savanna and the growth of that business over time.

Got it. During the presentation, you mentioned that the ramp to mid- to high 20s won't be linear. Is it fair to assume that Savanna is really kind of what will drive the step function change there as it ramps?

Savanna definitely has an impact. I think we've been saying it's around a 200 basis point drag on the -- on our profitability in the short term. Although, we are in clinical trials for our Respiratory assay, we expect to be in trials for our STI assay in 2025. I would say that the story for that from a revenue and cost improvement standpoint is likely to play out more in 2026 and 2027, as opposed to this year is -- I think the approvals we get will probably be late in the year and have a de minimis impact on -- or minimal impact, I should say, on the business.

Okay. You mentioned the 200 to 300 basis point headwind from Savanna that you've called out previously. How would you see that dissipating post-launch? At what point does Savanna really become a tailwind, you said in '26, '27? Can you just -- like what kind of revenue run rate would we see before that really comes to?

I don't think we've shared the revenue run rate publicly. But I would just say, again, it's going to be a '26, '27 story, and we'll be ramping that platform as quickly as we can to get the maximum benefit from it.

Got it. Maybe switching gears. Just in terms of other recent business highlights. Last quarter, you talked about flattening the organizational structure. Just any sort of rationale behind that decision? What went into it? And then how is feedback in both internally and externally?

Yes. I mean it's really, to a certain extent, a matter of some personal preference here. I've always operated businesses with a very flat responsive organization structure, and in this business of this size, really didn't think we needed the aggregating positions of a broad COO position and Chief Commercial Officer role. I like the direct communication and the closer access that I get to the markets and what's happening there with our customers. The feedback has been super, especially, I would say, the feedback, first and foremost on Jonathan Siegrist is our new CTO. He's already hit the ground running, adding a lot of value as well as Lee Bowman, our new Chief Human Resources Officer, who has really been a partner for me and Joe and Juliet and the rest of our team here as we're shaping this new organization. But the feedback so far on our -- the structure and the team we put together internally has been very good, and I'm looking forward to working with all of these folks as we take the business to the next level.

You mentioned Jonathan there, Jonathan Siegrist, you hired over from Cepheid to be your new CTO. Curious what does he bring to the table? What are some of his priorities, both in the near and medium term? And are there any areas of focus in terms of menu expansion beyond what you've previously stated. Yes, just any color on that.

Yes. I mean, Jonathan has got a very deep 15-year track record in assay development, systems development, particularly in the molecular space, but also in the traditional immunoassay, clinical chemistry space. And so certainly, we're looking for his help and the strength of his background in taking our Savanna platform to the next level. But way beyond that, I think he's going to help us in terms of creating the right R&D organization for the future of this business, improving our R&D productivity and whether that means addressing some of our life cycle management issues we have in the short term, expanding our menu or as we think forward, the things we have to do for next generation platforms, I think Jonathan is going to be really integral and helpful in that. And like I said, he's already hitting the ground running and doing a great job for us.

Got it. I wanted to ask one on the point-of-care outlook. I think you just mentioned in the slides that you expect mid-single-digit growth over the long-term. Curious how much of that will come from Flu and Respiratory? And then -- just any update on the competitive environment for Sofia and how you see that playing out?