QuidelOrtho Corporation (QDEL) Earnings Call Transcript & Summary

We can look to get started. Thank you for joining us. I'm Patrick Donnelly, the tools and diagnostics analyst here at Citi. Happy to have Joe Busky, here from Quidel. Thanks for being here, Joe. Thanks for coming down. Maybe just chat a little bit. I was a little surprised by the stock reaction after 3Q. Any interesting feedback you heard from investors or the pushback on the quarter? Again, the sell-off was pretty steep. It's bounced back nicely. And then again, you guys did some insider purchases, which was good to see. But what was the feedback you heard from investors kind of post the quarter?

Well, first of all, by the way, thanks for having me here, Patrick. Good to see you.

Likewise.

We were perplexed as a lot of people were with the reaction. There's obviously a lot of puts and takes that go into stock price going up or down. But based on what we've learned, it seems it's a combination of a bunch of things, a fairly high short interest before the earnings call, some increased put option exposure prior to the earnings call, some tax loss selling, some quant fund activity in a bit of a perfect storm. But -- and there were 2 areas that were -- that we've heard that subsequent to the call that potentially people questioned, 1 was cash -- the cash flow timing related to the ERP conversions. And one was the when we narrowed the guidance and it pushes out a Q4 that's got slightly lower margin sequentially. We addressed both of those issues on the Q3 earnings call, though. So it's just -- it was an unusual thing for sure.

Yes, for sure. Yes, maybe we can dive into a couple of those. I mean, the cash flow piece you mentioned, we definitely got some questions on that. Can you just refresh us on where we are on the cash flow so far this year, the guidance and what's necessary in 4Q and just the visibility on that front to your point.

Yes. So the guidance we put out on cash flow since the beginning of the year was to be at adjusted free cash flow for the full year of 25% to 30% of adjusted EBITDA. And we are tracking towards that range. Obviously, in Q3, we had a bit of a hiccup with the system conversion, which had the impact of delaying some cash receipts on receivables from Q3 to Q4. But we do expect to have a fairly strong Q4 in terms of cash because we are, for sure, collecting all that cash that we would have normally collected in Q3. So the range of the guidance is still the same. The target that we're trying to get to a little longer-term of 50% of adjusted EBITDA cash flow. We expect to make some progress towards that next year in 2026 and then expect to get at that goal as we get into 2027, similar to the margin goals, where you expect to get into the margin target range in 2027 as well.

Okay. So maybe a little bit of push out from cash, 3Q to 4Q, but feeling pretty good about the gap?

Same for the full year. It's just some quarterly noise.

Okay. Got you. And then maybe we can just kind of run through a few of the business. I mean the Labs business has been pretty consistent. 3Q, I think was a little over 4% constant currency. Maybe just talk through that business. It feels like it's pretty solidly on that mid-single-digit growth trajectory. We'd love to dive into that business a little bit and talk through the underlying drivers?

Yes, sure. And maybe even before I get into more Labs, let me just take a short step back for the full quarter. I mean, for the quarter and the year-to-date results, we felt we had really solid results which were above expectations. The total revenue, excluding the COVID revenue and the donor screening revenue, which we were winding down that business was 5%. So the base business is growing 5%. Now within that, to your point, Patrick, we've got labs growing at 4%. We've got immunohematology grew at 5%. Triage grew at 7%. So these are all really good indications of the underlying base business doing pretty well. And again, it's both for Q3 and year-to-date where we're seeing these solid results. Labs, yes, I mean, we've always said, since I got to the company 5 years ago, And we took Ortho public back in 2021, Labs is a mid-single-digit growth business, and it's been right there for really all those 5 years. The win rates within our Labs business continue to be consistent that's both on new business and existing business. We continue to run the strategy of leading with integrated analyzers, which is having the effect of driving more higher-margin immunoassay revenue, which is, again, the strategy we've been employing now for 5-plus years. So we're -- I think we're year-to-date at a little over 5% for labs growth, and we should be right there for the full year, around 5%.

Okay. And in that business, I mean, to your point, consistent, good visibility, long contracts, right, 5 to 7 years, maybe on average. In terms of those contracts, -- maybe just talk through the structure, I mean, minimal consumable orders, pricing levers, are you able to adjust as we go if things like inflation, tariffs, maybe talk about the contract structure and any changes in terms of those discussions over the past couple of quarters?

Yes. It's a super stable business. It's very predictable. So when we put out our guide -- our annual guidance the nonrespiratory piece of our revenue, which has made up a lot of Labs and IH are very predictable business. And again, Labs is half of our business. It's half of our revenue. So when you think about the stability of QuidelOrtho you got to think about the half of the business is the Labs business unit, which is super stable, predictable. To your point, 5 to 7-year contracts with guaranteed minimums. The minimum spends are typically set at around 90%, 9-0, of what we think the customer is going to use in that particular year. So it's a high number. And again, with these hospitals, you can fairly easily predict what the flow-through is going to be. So we don't have a lot of customers who typically fall significantly above or below those minimums that we set. So it's a pretty forecastable business from a customer standpoint as well. We did not have in the inflation adjusters in the contracts with our customers during the years '22, '23 and '24 as we were experiencing higher than normal inflation in our U.S. or global economy. We've since started to put those inflation adjusters back in starting in '24. So as we work through all the contract renewals within the next several years, all of our contracts will have those inflation adjusters back in them again.

Okay. And any changes in terms of pricing, how you're thinking about that piece? Any changes on that front?

Yes. The pricing in the Labs business has been pretty consistent. I've been in this space for a long time. Having -- going back to 1997 at Dade Behring. And I've seen this movie every year since. It's -- there's -- the 5- to 7-year contract renewals create some really competitive renewal processes. And so we have seen about 1 point to 1.5 points of price erosion every year on the lab space. And that's not just for us as a company, it's everyone in our space. We're all experiencing that same erosion every year. So it's just something that's that you build into your models. And we know that from productivity perspective and from other pricing actions maybe on new menu, you got to find a way to get that price back.

Yes. Okay. And then the immunoassay to integrated analyzer piece, that ratio you've talked a little bit about in the past, I guess where are we in that evolution? Where do you want to get to? Where are we? And what could that mean on the economic side, margins, whatever it may be.

Yes. So maybe just a quick background for those who are maybe new to the story, the revenue -- our labs revenue is inverted from where the market is in terms of routine chemistry and immunoassay business. The market is 2/3 immunoassay 1/3 routine chemistry. Our business is the opposite of that. We're 1/3 immunoassay, 2/3 of routine chemistry in round numbers. And the best way I think for folks outside the company to measure our progress in this area is to look at our integrated installed base as a percentage of the total. So the integrated analyzers of the analyzers that run both routine chemistry and immunoassay. And so our strategy is to lead with those analyzers, so we can run both types of assays. When I took Ortho public back in 2021. Our integrated installed base was 25% of the total. As we sit here now, it's about 30% of the total. So that's sort of the state of progress that we're moving. And I think the good news about that stat that I just mentioned is that there's a long runway left to go with this strategy. Where does it go ultimately? I think probably should get up to around 50% of the integrated base of the total. So again, we've got room to go, and we'll just keep running this strategy.

And are those much different margin profiles? Is there a mix shift that we should be keeping an eye on there?

There is. The immunoassays are typically higher-margin assays than the routine chemistry assays. And my estimate is that we probably pick up a margin tailwind of 10 to 20 basis points annually from this strategy. And again, that goes to offset some of the price decline that I mentioned earlier.

Yes. Okay. And then I think it was the last call, you were talking a little bit about the troponin tests getting approved. I mean how meaningful can some of these one-off test be? This one included. Any metrics we should be keeping an eye on in terms of the adoption there and getting that out in the market?

Yes. First of all, big congratulations to Jonathan Siegrist, our Head of Technology and Head of R&D within the company for getting this assay approved with the FDA in the U.S., it's a big accomplishment. It's hard to get this assay approved. There's not every company in our space has this assay. We have it in Europe. We have it approved under CE in Europe, and we've had it for several years, and it's very successful. We knew that we needed it in the U.S., and we got there. We got it approved about a month ago. So again, congrats to our team for getting it done. It's an important assay. As you think about the clinicians and the doctors in the U.S. and how they practice, there's definitely a movement towards the use of high-sense troponin with cardiac patients from other markers. And so we felt it was very important to have. And so I don't think any one assay can move the needle tremendously with revenue growth, like I'm not going to sit here and say, our Labs business is going to grow any greater than mid-single digit. But I do think that the approval of this high-sense troponin assay is important enough that it should give us all confidence that we can continue to grow at mid-single-digit growth.

Yes, yes. Okay. And then I'm sure you don't go too many discussions without touching on China. Maybe we can just discuss that a little bit. Your guys' results, I think you did 5% growth last quarter, a slight adjustment to the guide in 2Q that we can discuss. But was it competitive dynamics? I guess what have you seen in China as this year has evolved? And then we can get into the reimbursement piece maybe after that?

So our business has been a little more immune from a lot of the actions from the Chinese government to bring costs down. We've really not been significantly impacted by the VPB or the DRG or the reimbursement actions that are coming out of China as compared to some of our competitors. And really, that's a -- it's a function of the nature of our business. being more, as I said a minute ago, more heavily in routine chemistry than immunoassay and also our business being more focused on the stat market within China versus other areas of the health care system within China. We did see some slowdown in our revenue growth as we went from the back half of last year through the first couple of quarters of this year, and that was mainly driven by the reimbursement issues on the cardiac assays. But we've -- we're through that now. It's been 4 quarters and we think we've got that built into the numbers. We do expect to have a good quarter in Q4 and we do expect, again, that the Chinese market for us will be a mid-single-digit grower for the full year 2025. So we're -- Brian and I are bullish on the market. We think there's lots of opportunity, and we'll just continue to monitor what's coming out of the Chinese government and what's going to impact us.

Yes. And I guess in terms of the reimbursement side, it's not just you guys. I mean, anyone who has a China diagnostics business, it seems to be this fear that another shoe is going to drop, and reimbursement is going to be a cut. You guys, I think saw a little bit in the Triage business, to your point. How confident are you -- what's the right way to think about just the scope of some of these changes? Why are you guys insulated versus others? It would be helpful to talk through that because it certainly comes up?

Yes. Again, I think a lot of it comes back to the nature of our business, the dry slide technology versus wet chemistry, the heavier focus on routine chemistry which has been more outside of a lot of these DRG reimbursement actions. So at this point, we're not aware of anything that's going to impact us. And we watch our team on the ground there watches it very closely. We had honestly, no new news to report on the Q3 earnings call, which Juliet and I read all the other transcripts from everyone in the space and really no one had any new news on China in Q3. So it's kind of a quiet quarter in terms of new things coming out of the Chinese market.

Yes. And what's the right way to think about, to your point, good large market. What's the right way to think about the growth rate there? Obviously, you guys have some of the VBP stuff in there with Triage currently. As we get beyond that, what could this market be? What's the right way to think about just the baseline growth for China for you guys?

I actually think at this point and maybe before we give more granular 2026 guidance, I would just assume it's mid-single-digit growth market. That's a fair assumption.

Okay. That's fair. And then maybe we can turn to the immunohematology business, again, performed pretty well last quarter, a little bit above kind of -- I think it had been low single, a little more mid-single this quarter. Anything jump out in terms of calling out in terms of the growth drivers and the sustainability there?

Well, I want to point out first that for that immunohematology business, we are the #1 market position for that business globally, not just the U.S., but globally, we're the #1 market leader. We had a great quarter in Q3 at 5% growth. However, I think there was a little bit of timing between Q3 and Q4 shipments and Q4 growth will probably be a little bit lower. So the full year will likely still be in that 3% to 4% growth rate, which is where our expectations are for that business.

Okay. And it seems like region-wise, I mean that's been doing a little bit better LatAm, EMEA. Is that the same thing? Is it timing? Are you feeling a little bit better about those markets? What's the geographic kind of thought process?

I think those markets have been growing nicely for not only immunohematology but also Labs and also Triage. We are -- our commercial leaders in those regions are just doing a fantastic job with their teams in selling those products. And in those markets where health care is still in -- very much in the process of expanding. We're doing quite well and winning a lot of good deals in those areas. So I think I expect that to continue as we move forward. And that's all part of the lab to mid-single digit and the IH 3% to 4% and Triage high single digit. That's all built into those target growth rates for those businesses.

Yes. And I think it was a few weeks ago, you had another FDA approval in this business, the micro typing systems card. How material is that? What does that mean for the business? Maybe just kind of pull the curtain back a little bit there?

Yes, all these menu improvements, being in the diagnostics space, it's all about keeping up with menu and -- it's a bit of an arms race at some point when you think about all the companies working on menu. If you don't keep up with menu, that's how you fall off tenders around the world. So we are doing a great job. Again, another hats off to Jonathan Siegrist and his team, the R&D team. That one specific one you mentioned, fills out our gel-based portfolio in the U.S. And again, I don't think any one assay will move the needle greatly, but it's definitely a nice confidence builder and definitely makes us much more competitive in the U.S.

Yes. Okay. And then maybe just as we think about kind of bridging between legacy transfusion medicine, immunohematology segment, post-U.S. donor screening exit, which we can get into a little bit. I guess, how do we think about the cost margin structure of the updated segment once the U.S. donor screening is officially out? And then again, maybe a quick update in terms of just the transition there.

Yes. So donor screening was a business that it's a U.S. donor screening market that we decided to exit last year. And last year, it was about $120 million of revenue. This year, we'll finish probably close to $50 million of revenue as we wind that business down and exit customers. The wind down will complete in the first half of -- largely complete in the first half of '26. So we will see some revenue next year in 2026. But I believe the headwind on the revenue line for total company will be much less. I think it will be as opposed to 2 or 3 points of headwind this year on the revenue line. It will be closer to 1 point of revenue headwind next year on the revenue line. So the wind down is going as expected. We will see some margin accretion once we have that business fully wound down and stranded costs pulled out, and I expect that to be more of a late '26, '27 event. And we've sized that margin accretion probably somewhere between 50 and 100 basis points that we can pick up because the immunohematology business is a good margin business, but the donor screening business was definitely a lower-than-average total company margin business.

Yes. And was that -- in terms of the wind down, obviously, you guys are very focused on the margin side? Was it just, say, the profitability is not there. Let's walk away? What goes into those decisions?

Yes. The portfolio optimization decisions are always tough, but this is a business that's U.S. donor screening business. It's relatively small in market size. It's less than $1 billion in size. It's low growth, definitely low single-digit growth. And as I said a minute ago, lower -- overall lower margins than our corporate average. And when you think about where we are right now with scarce resources being allocated within the company and where we want to spend our R&D dollars we decided that we would get more ROIC from investing elsewhere and shutting down the donor screening market.

Okay. Yes, maybe we can flip to the point-of-care side, a few layers there. Maybe we can start on the Triage side, we'll move into kind of the COVID and respiratory piece. I think that was growing 7% in the quarter, good utilization cardiac, BNP, seemingly a little bit of international. So what's the right way to think about the growth drivers there, the opportunities going forward on the growth side for that business?

So total point of care business unit, I think the star of that business unit is Triage. We are -- we're seeing real nice growth there particularly outside the U.S. And again, we do expect that business to be a high single-digit growth business this year and next year as well. We -- our operations team has done a nice job over the last year or so pulling cost out of that product and making it much more attractive and much more marketable and much more competitive around the world. And so it's really starting to pay dividends now. So we're we like what we see there with Triage. I guess the other -- on the other side of the coin, you've got the COVID revenue. The COVID revenue is going to come down about $100 million from last year to this year. So again, another roughly 3 points of headwind on the top line for total company. But we do believe that now that there is no more government orders in that number for this year, and the retail business is not there in the numbers. We think that the midpoint of our guidance this year at roughly $80 million of COVID revenue for this year is probably pretty darn close to an endemic level? I mean could have come down some more? Yes, it's possible. But it's all professional use space revenue, and we feel like we've got a better handle on those customers, and we do feel like it's kind of stabilized. So even if there is some further decline in '26, I don't deem it significant at this point. So I think we've gotten through -- we've digested a lot of that COVID revenue decline. And then what's left is the flu and RSV and Strep revenue within point of care. That business, as a reminder, we're the #1 market leader in the U.S. for pretty much all those products. And it's becoming a little more stable to predict the further we get away from the pandemic. Our new modeling that we went to in 2024 is proving to be pretty accurate. This is the new modeling that focuses on the market size in terms of volume of tests, the mix of tests between combo and stand-alone flu and the market share that we have in the U.S. And so the original respiratory guidance that we put out at the beginning of the year is still holding through. We have not moved off of that original guidance that we put out in February. So we saw a pull forward of revenue from Q4 into Q3 for some flu revenue, which I believe some of our other competitors had mentioned the same thing. But because it was a pull forward, we kept our full year respiratory revenue the same in terms of guidance. We didn't change it. It was the pull forward from Q4 to Q3. And as you move into '26 and beyond, that flu RSV strep, the overall market growth is mid-single digit, and we're right there.

Yes. And when you think about the COVID flu piece, there's obviously the combo test. There's the solo COVID test. What is your mix currently? What's the margin difference there? Is that a dynamic worth calling out?

It is a dynamic worth calling out. We are seeing that when the COVID virus is prevalent. And when the flu variants are prevalent that the doctors will use the combo test. When there's no flu present, they'll use the COVID-only test. We tend to have COVID pretty much existing through the whole year. It ebbs and flows, up and down, but it's pretty much -- it's there all year flu as everybody knows, is pretty much only there from, say, October through April or so. So the combo test is used when both viruses are circulating. And it's proven to be pretty durable. It's been it's been over 50% of our total flu revenue mix for now 2-plus years. And it's actually increasing in mix. It's not like it's a declining mix. It's actually steady to increasing. So we do feel it's a pretty durable product. It does come at a slightly higher price, and the margins for us are slightly higher than just the flu A/B test.

Yes. Okay. And as you know, I mean everyone tracks kind of the southern hemisphere, assuming that's coming our way, is that the right way to look at it? What's your guys view? And how are you framing up this respiratory season versus past to your point. 3Q was a little better for you, among others, with the pull forward? Any thoughts there?

Yes. The Southern Hemisphere is definitely a data point that we all want to look at when you think about flu. And the Southern Hemisphere flu this year was a strong one. It was one of the strongest ones they've had in quite a while. And so that's definitely a good data point for us. I think the peak might have been similar or slightly lower than last year, but the duration was longer. We're also now seeing some good data points out of the U.K., which seems to be a little bit ahead of us in terms of flu circulation and the variant there has proven to be a pretty strong one which is also another good data point. The vaccination rates, particularly in the U.S. are down. Unfortunately for the population, I think, but it's probably a good data point for us and flu revenue as well. And then, of course, we have our Virena data that comes from the Sofia LIS system. And so we track on a real-time basis, everything that's running through our customers activity. And again, we have -- we see that in real time. So all those data points tell us that we're pointing to, it looks like a pretty typical flu season that's going to start kicking up pretty soon.

Okay. And maybe flipping to molecular, obviously, some pretty big news there over the past couple of quarters in terms of pivoting over to LEX from Savannah. Maybe on LEX, looking to enter the market with respiratory assay, maybe just refresh us on the steps needed to get there, the timelines, what it means to you guys and just kind of walk through that catalyst set.

Yes. So LEX. LEX is the business that we invested in back in '24, and we've got an exclusive option to buy the entire company once they get FDA approval in their first panel. The first panel is a flu A/B COVID test. And we do expect, based on our discussions with the FDA that will get approval, they'll get approval of that panel late this year, early next year. And once that happens, we will very likely complete the acquisition of the company shortly after that. And then we'll start a very, very limited commercial rollout in the first half of '26. The -- I think the more robust rollout of commercially of that business would be in the second half of '26. So I don't expect significant revenue from the business in 2026. I would expect that to further more fully ramp up in 2027. As far as the next set of tests or panels, RSV and strep will be the next panel we would roll out. And then following that would be women's health panels. And that would go a long way to getting us where we need to be with that product.

Okay. And maybe just the path to the approval, obviously, I think investors have a little scar issue from Savannah in terms of the timeline pushouts. How confident are you guys in terms of these timelines? What -- I guess, what's the confidence level? What hurdles are left to clear just the view there?

Yes. I think the 2 salient points there, Patrick, are that we've got -- we have essentially a new team in place that's dealing with the FDA. We've got Jonathan Siegrist, the new Head of R&D. We've got a new head of regulatory. We've got a new head of quality. And these folks are really good at what they do. And they've been in pretty much constant discussion with the FDA since the submission was made. And we have a pretty good confidence that it's going to get approved again, late this year, early next year.

Okay. And LEX a little bit different markets, a little more decentralized. Savannah was maybe a little more hospital based. You guys had a commercial strategy. Has there been a little bit of a kind of change in the strategy? How does the rollout of this compared to what you guys were thinking with Savannah?

Yes, that's a really good question. Savannah, which by the way, we're still serving our customers, Savannah customers. We'll serve those customers throughout '26 and even into early '27. We're not developing any new menu. But for the menu that we have out there, we are certainly serving our customers. And there's there might be $6 million to $10 million of revenue this year. So it's not completely insignificant. And I would expect similar revenue next year with Savannah. And by the way, we're going to very much try to transition all of our existing Savannah customers over to LEX. But the markets, there's a bit of overlap between the 2 Savannah was probably a little more focused on what I would say is small to midsized hospitals, which was a greater overlap with the legacy ortho commercial team selling into small and midsized hospitals. LEX, you're right. It's a little further downstream in the market, physicians office, POLs, urgent care centers, EDs and small hospitals. And so there is some overlap between LEX and Savannah. But I think the good news is, is that the market that LEX is going after is the same market we sell into now. So the important point there is that we do not have to make any significant investment to commercialize LEX. We have the sales team, we have the distributor relationships. So no significant investment needed to commercialize the product. We know that market really well. It's a large market. And by the way, that market is actually growing faster than the market Savannah was going into the market that LEX will address is growing high single digit.

Yes. Okay. And then to your point, I was going to ask about sunsetting Savannah. It sounds like encouraging customers to switch over, is there a discount plan when you switch from Savannah to LEX? What are you guys doing to -- it sounds like, again, the revs may be similar next year, but I'm sure there's a desire to kind of sunset that at some point..

I'll be honest, I don't know the specific. I hope there's not a lot of discounts involved I just know there will be a concerted effort to transition those customers over as we move through 2026.

Yes. Yes. Understood. And then maybe the margin opportunity, I mean, that's always been a big piece of the story here. You guys have cut a lot of costs, and there's a big opportunity on the margin side. I know a big focus for you. Can you talk about where we are so far. I know the recent initiatives delivered over $140 million in cost savings. Where are those coming from? You guys did a big headcount reduction over 10% of the workforce, I believe. So maybe just talk about what we've done so far in terms of the cost savings for you guys and then we can get into the future opportunities as well?

Yes. We did mention on the Q3 call, I think Brian mentioned this in the script that we've taken out $140 million of costs since mid-'24. The majority of those costs about $100 million were related to staffing reductions that we implemented in mid '24. And those are all now fully built into our numbers as of the end of Q2. And then the remaining roughly $40 million is primarily indirect procurement initiatives that we've executed this year in 2025. There's still more procurement initiatives in the funnel and in flight, and that's what's going to lead to, for the most part, the 100 to 200 basis points of margin improvement that we've talked about for 2026 full year. So those projects are in flight. We're monitoring them pretty closely. And most of those projects, I would say, are mostly direct procurement related, which take a little longer. They're a little complex. involve more resources, you have to pull in quality, regulatory, R&D in addition to procurement and operations. And that's why they take a little longer. And there's actually a little bit of incremental cost we'll incur in '26 for those projects to get them down. But we will start to see the benefits in '26 and into early '27 from those direct procurement initiatives. As far as headcount, staffing goes, Brian and I are trying to get away from like big bang cuts of headcount, that's really can be really disruptive to the business. So we're trying to steer the organization into more of a continuous improvement culture, where you're just constantly looking at where your headcount should be based on where the business is ebb and flowing.

Sure. And to your point, 100, 200 bps next year. I mean, is that contingent on any -- is there a need of a certain amount of revenue growth to get that? Or is it more a -- this is what we can control and if you start to get some real revenue growth to flow through, it would be a little more positive?

Well, it's predicated on us continuing to grow the base business in the mid-single digit. I think that's the assumption. And again, with the stability and the predictability of roughly 80% of our revenue in Labs, in immunohematology, feels like a pretty good assumption for us to make. And we've also assumed that COVID is going to be fairly flat -- and again, the donor screening, like I mentioned earlier, will be about 1 point of headwind. But that's all factored into that 100 to 200 basis point margin improvement.

Yes. And I was going to ask in terms of the key variables to think about as you think about the top line next year, to your point, you have the base business, the COVID piece, the donor screening. Is there anything else to call out in terms of variables that we should be thinking about as we look ahead to next year?

On the revenue line I think that's it. I think on the margins, the only thing we need to get a little more granular on once we get approval from the FDA is LEX. And what does LEX do to the margins, I think it's more likely LEX is dilutive in 2026. But it all really depends on how much product we sell, what the slope of the commercialization is, how fast the revenues climb. But I think it's more likely than not that LEX is dilutive in '26. And then hopefully, we start to reverse that trend in 2027.

Sure. And then you guys do have out this longer-term margin target, I think it's mid to high 20% by '27 I think I believe you reiterated on the 3Q call, but is that still the path and any big initiatives we obviously talked about a few into next year in terms of the levers needed to hit that? Anything you would call out?

Yes. I think very much still the target range that we're looking at. And by the way, that target range is very much in line with other pure-play global diagnostic companies. It's not -- we're not trying to overshoot margins that no one's ever done before in our space. Those are pretty typical margins for companies like us. And we're going to go from 19.5% EBITDA margin last year at 22% this year. And again, we've already put out that we think we can be between 23% and 24% adjusted EBITDA margin next year. And then as you move into we'll have the Raritan, New Jersey facility consolidation, which will provide almost another point of margin improvement. We'll have the donor screening shutdown, which will provide some margin accretion. And then LEX is probably sort of the wild card of what does the slope of that commercialization look like? And when does it flip from dilution to accretion whether that's 27% or 28%. I think that's a TBD.

Yes. Okay. In the last couple of minutes, I just want to cover the balance sheet a bit of a topic with you guys over the years. We obviously chatted a little bit about cash flow earlier. It sounds like you're still confident in the numbers for 4Q. Can you talk about just the leverage side, where we are today, where you guys want to get to? Obviously, the LEX acquisition, we haven't seen much acquisitive nature out of you guys, just given the balance sheet. But -- maybe talk through the leverage side and the goals there and the path?

Yes. So the leverage ratio at the end of Q3 was 4.4%, which is obviously not a surprise to us, but not where we want to be. It's just too high. We absolutely know that there has to be a focus on increasing cash flow, decreasing the onetime spend of cash and bringing that leverage ratio down. So we believe that the leverage ratio will come down from Q3 to Q4. And I also believe that it's going to come down in '26 as we continue to grow EBITDA, and we continue to have less onetime cash spend and then we also execute on a bunch of inventory reduction initiatives that we've got in flight that will start to bear benefit in 2026. So I would expect us to get down into our target leverage ratio range of 2.5X to 3.5x as we move through the end of '26 into early '27.

Okay. And then the cash conversion, to your point, you have that 50% goal. Is that -- should we just see some progress next year? Is there any timeframe around when you're looking to kind of...

Yes, I think that's the right way to think about it. I think that we would make some progress against it next year. But I don't -- I wouldn't expect us to get there again until '27. '27 is a year where a lot of these in-flight margin initiatives and cash flow initiatives really start to fully execute. So I'd expect us to get there as we move into the second half of '27.

Okay. I think we're right at time, Joe, so we'll leave it there. Thank you so much.

Thanks, Patrick.