Good morning. My name is Yuka Oku, and I'm on the Life Science Tools and Diagnostics team at Morgan Stanley. Before we begin, I'd like to remind you, for important disclosures, please see Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. It's my pleasure to host QuidelOrtho, and speaking on behalf of the company, CEO Brian Blaser and CFO Joe Busky. Thank you for joining us today.
Good morning. Thank you.
Brian, to set the stage, 2024 has been quite a transformational year for Quidel. Can you just talk about the company's key accomplishments over the last 12 months or so?
Yeah, I'd be happy to speak about what's happened since I joined the company, and then I'll ask Joe to maybe talk about the broader twelve months. But, you know, I joined the business in May, and, you know, my initial focus was, you know, first understanding the situation, but first and foremost, getting the business focused on satisfying our customers in the best possible way, and getting our cost structure programs aligned to drive the results that we needed to accomplish. Our Office of the CEO prior to me had really leaned into that hard and identified a significant amount of savings, but we needed to do more, and ensure that the initiatives that we had identified were on track in delivering the results.
So we've got a lot of focus and energy there. And then it was about creating focus around some of our business priorities in terms of the R&D portfolio, our cost structure initiatives, and other menu expansion programs in the business. And so we've really focused the organization around that and are making good progress. At this point, my attention is turning to our longer-term strategic plan, and the team is making good progress in that area as well.
Yeah, I would just add that in the two years, three months since we combined these two companies, which we still believe is a fantastic combination of two great companies that creates a much stronger company. We have integrated, we have harmonized these two companies, and now, to Brian's point, it's time to get to the cost optimization and the margin improvement, and that's the focus now.
Great. And can you talk a little bit about your strategic vision for Quidel and how the company's strategy may differ from that of your predecessor? Your predecessor had previously outlined a LRP 6-9% organic ex-COVID growth, 27-29% adjusted EBITDA margin by 2025, double-digit adjusted EPS growth into 2025. Are these targets still intact, or are they being re-evaluated?
Well, we're in a position right now where we're not providing guidance at the moment, but, you know, what I can tell you is, what I liked about this business, as I approached the opportunity, was the fact that, we have a business here that really touches healthcare in every patient setting, you know, from diagnosis, treatment, monitoring, prevention, you know, the entire continuum of healthcare, and fully participating in both centralized and decentralized testing, opportunities. So our strategy is really gonna be around, fulfilling, you know, that mission across that continuum of care in the highest quality way, in a very patient-centric and focus way.
You know, as we pulled the curtains back on the business, you know, we've seen this last year, there's been a lot of sort of one-time events, but the underlying business here, especially our labs business, is a very, you know, stable, mid-single-digit growing business, you know, that I think we can do more with over time, in terms of menu expansion, refreshing our platforms, and then, you know, building out our molecular and respiratory capability, with Savanna and our other opportunities there. So that's what we're looking at at this point.
And before we dive into labs, do you feel that there is more room for portfolio shaping as you evaluate the business, or was the donor screening exit really a one-off situation?
I think that the donor screening exit made a lot of sense coming out of COVID and just giving where that business was competitively. At this point, you know, I've looked at each of the different segments that we're in. I like the business and the portfolio that we have. I think each of the segments can do more, both in terms of profitability and growth, with the right level of investment and focus, and so that will be my focus in the short term.
Starting with the Quidel's lab business. As you mentioned, it's a steady business with high recurring revenue and long-term five, seven-year contracts. It's been a solid mid-single plus a mid-single digit plus grower, growing at 8% in 2023. In first half 2024, the business has been about flattish year to date, even when excluding COVID contributions. How has the performance in the first six months of the year done versus what you expected? And what is your outlook for this business for the rest of 2024?
Yeah, I think when you take away some of the one-time factors, especially, we had a comp year-over-year related to our instruments, where we had a huge backorder of instruments relieved over the last twelve months. And when you strip that away, again, the labs business is growing in this mid-single digit range. You know, I think the nice thing about that business for us is, as you mentioned, we have long contracts in that business, so it's a relatively durable business. But as you compare us to other competitors, our mix between traditional clinical chemistry versus immunoassay is shifted kind of a hundred and eighty degrees away from our competitors. We're mainly a clinical chemistry business with about 30% penetration in immunoassay.
That represents a great opportunity for us to drive immunoassay growth in the business, which does two things: It enables the growth of the business, but also helps improve the profitability, because generally speaking, those assays have higher profit margins than the clinical chemistry business. So, that's been a strategy that the business has employed over time, and that will continue to be a strategy that we drive across the business in the future.
And if I could just come back to your point on the first half performance. In addition to the headwind of the instrument revenue that Brian mentioned that we had, 'cause we were drilling down a fairly significant instrument backlog that was from the prior year, there was also some non-core revenue that was rolling up into labs that as part of Brian's portfolio review, when he came in, that we've moved away from some of this non-core activity. And I would define it, this activity, as sort of contract manufacturing within the labs business. So we broke that piece of the business out pretty clearly in the Q2 earnings call.
But when you strip out that non-core piece that we've exited from, and you strip out that instrument revenue headwind because of the backlog drill down from the prior year, the recurring business was up solid mid-single digits. As we said on the Q2 call, we believe in the second half of this year, that that business will again be solid mid-single digit as you move through the second half of the year. You know, it's kind of a nice business for a finance guy to have, because those five to seven-year contracts make it a durable business, but also make it a little easier. I hate to use the word easier, but a little easier, more manageable to predict and forecast. It's a very, you know, fairly predictable business for us.
As you mentioned, immunoassay represents a high growth opportunity, relative to clinical chem. How do you envision the growth opportunities for the business between greater adoption of integrated analyzers, menu expansion, adoption of high-value tests, such as PCT, AMH, or U.S. expansion, and other factors?
Well, I mean, if you're asking how we think the progression of immunoassay growth evolves in the business, I think I'd point you to the historical growth of that. So, you know, five years ago, I think about 20% of our business was immunoassay based. You know, today it's close to 30%. I think that sort of trajectory continues for us in the future over time, you know, on about that pace.
Okay. Where do you expect integrated analyzer penetration of your installed base to go versus 30% today? What does the slope of that curve look like, and what can you do to increase the uptake?
That's kind of what I'm pointing to is, you know, that trajectory over time is how I see it. It's an opportunity for us in really every market that we participate in, so both in the US and then externally, OUS as well.
That 30% of integrated analyzers, I think by design, it's gonna move fairly slowly, because if you think about the nature of the business, it's, you know, typically five- to seven-year contracts, where only 15%-17% of the deals come up for renewal each year. It's gonna move in that same pace that Brian mentioned before, you know, going from, like, say, low 20s up to 30%. You know, it should run at that same pace going forward. So I think the bottom line is, we've got a lot of room left to run on this strategy of leading with integrated analyzers and replacing standalone analyzers with integrated. There's a lot of room left to run on this strategy.
Got it. In terms of the menu itself, STI testing has been flagged as a key growth driver coming out of the pandemic. Is that your experience as well? How should we think about sustainability of that growth? And on STIs, do you view the current monkeypox situation as a driver of growth?
Yeah, well, I would just say we do see STI as an opportunity for us. And with our Savanna instrument, we have an STI panel in development that we expect to be on the market with in twenty twenty-five. So it is an opportunity. With respect to the monkeypox situation, we're not really focused on that at this point. You know, I've had to kind of focus our organization on critical priorities, and just as a matter of you know, investment and return and looking at that opportunity, that's just not an area of focus for us right now. We'll be monitoring that situation, and if things change, you know, we may look at that more carefully in the future.
Turning to China, you noted on your 2Q call, you expect high single-digit growth in China for 2024. China was about 10% of your revenue in 2023, so a decent size base. Can you talk about your business in China? Why have you been so successful there? Are we seeing some kind of temporary bullish, or do you see the country continuing to be a mid-single digit, high single-digit grower over the near future?
Yeah, we continue to see the business potential in China in that high single-digit range. We have seen some impact from the anti-corruption activity in the government there that has sort of delayed our some of our tenders, but really isn't slowing our overall growth in the business. And we've been less impacted than others with value-based pricing because it's typically been focused more on wet chemistry and immunoassay, and we have a dry chemistry offering there. So our business has been less impacted by that. And you know, we have a very good value proposition for the stat labs there with a solution that provides you know, a lower total cost of ownership that we're able to differentiate from the competition.
We continue to see a good opportunity there. We've localized some manufacturing in China. We have four of our instruments approved in the market for resale there, and see a, you know, nice continuing business opportunity there.
You know, this is probably another good example where it's good to look back in history a bit to answer the question, in addition to what Brian said. This business, that we have in China, it's primarily the legacy Ortho business for us. And if you go back and look at that legacy Ortho business over the last five, six years, it's been pretty consistently a high single-digit, even low double-digit grower. And I believe it does have a lot to do with the position that we have in the market, in that stat market. It's primarily for us, a routine chemistry market.
When you go back and think about that strategy we talked about earlier with moving towards immunoassay, this is a good example of an area of the world that we can continue to move further in the immunoassay direction and drive growth. We do believe that the growth is pretty durable there in China. We just have to watch those areas that we just mentioned, you know, the VBP and the buy local and anti-corruption. Keep a close eye on all those areas.
There are also some potential tailwinds from the recent, recently announced stimulus. Is this something Quidel might benefit from?
I don't think we've seen a huge impact there. I think, you know, clearly, anytime you have a stimulus that drives spending, we're kind of seeing stable results in the business so far. We haven't seen anything that would indicate a big acceleration, but, you know, always good to see stimulus by the government, especially directed at healthcare.
Okay, got it. And then moving on to Savanna, the platform provides a strong revenue growth opportunity for molecular diagnostics market. For those new to Quidel story, could you walk us through the value proposition of Savanna and why you're excited about the platform?
Yeah, well, you know, clearly I took a very hard look at Savanna coming in, to make sure that we had a pathway to success there, and I truly believe that we have a very strong value proposition with the product. You know, there's really three things you have to solve with a platform like that. You've got to solve turnaround time, ease of use, and cost. And, you know, the platform has got turnaround time under thirty minutes, which is highly competitive when you look at the other platforms out there. You know, truly, sample in, answer out value proposition, which many of the platforms on the market today don't really have. They...
A number of them all require some sort of sample prep or things that you have to do before you actually get your sample into the analyzer. And then we think, importantly, that we will have a pricing advantage relative to our competition that will enable them to drive higher margins. And, you know, we also looked at whether our customers at this point, having many of them having invested in other platforms, were willing to switch to a new solution. And by and large, the feedback we're getting back is, yes, the switching costs for this particular segment are relatively low. These analyzers are a relatively lower cost unit, so they'll be placed using a reagent rental model.
So the switching costs for the customer in terms of outright cash outlay relatively low. And then given the ease of use profile of this instrument, you know, the training burden is also relatively low. And I think we're also approaching the market at a time where a lot of the contracts from the COVID time period are starting to roll off, and this is a good time for us to enter the market. So we are very focused on getting Savanna into the market. I think it represents for our company still the most significant opportunity for growth in the short term for the business. We expect to be entering our clinical trials with the respiratory assay here later this fall.
We're underway with STI now, and we expect to have both of those assays in the market in twenty twenty-five. And then we are, you know, following on with additional menu, particularly looking at opportunities with a GI panel, following the introduction of those first two assay launches.
Are you willing to share any installed base numbers at this stage or, provide early customer feedback? How many tests do you need on the menu to get broad attraction, or will STI and respiratory be enough to see meaningful update?
I would say STI, the way I look at it is STI and the respiratory panel are kind of table stakes for us, certainly especially the respiratory panel, and we're gonna be looking to build out this menu over time so that we have a very competitive platform with a lot of content on it that provides you know great utility for our customers.
Yeah, and as far as the base, it's probably important to note that we have had this product in Europe now for probably almost a year now under CE Mark. You know, the box was approved as well as the respiratory, the four-panel respiratory, was approved. But the European rollout was always meant to be a limited rollout in only a few countries, really to get us ready for the larger, much more important U.S. rollout, which, as Brian mentioned, like, likely happens next year. So you know, we haven't had a lot of revenue come through yet. And even in the U.S., where we have approval for the box, and we have the HSV VZV panel approved, again, not a high runner on its own.
So once we can, we, you know, continue to fill out that menu in the US, that's when I think the installed base will start to ramp, and we'll talk a little more about what that looks like as we move to next year in 2026.
Okay, got it. And then based on the customer feedback in Europe so far, do you see any potential for cannibalization of Solana and Lyra from the Savanna rollout or other products in your respiratory portfolio?
Those are... You might be able to comment better than I can, but, you know, those are relatively specialized applications. They're in a relatively small business, so I don't see a significant cannibalization opportunity. I think those platforms will continue to coexist with one another.
That's right.
And then maybe switching over to point-of-care, have a large installed base with 90K Sofia instrument installed and more than 16K Triage placements. With this large install base, you talk about menu expansion being a key driver of growth for the business. Can you talk a little bit about your menu expansion plans and some of the key tests you plan on adding to drive growth?
Yeah, menu expansion with Sofia is an opportunity for us, and our next area of focus is gonna be on toxicology and drugs of abuse. And we've got programs underway to build those panels out on that platform as well.
Great. One of the questions are focused on in the area of diagnostic testing is this shift from central lab-based testing towards point-of-care testing, driven by the COVID pandemic. How do you see the market evolution for diagnostic testing in terms of centralized testing and decentralized testing? And do you see the decentralized and point-of-care testing taking share, or do you think there is room for both?
I think there's room for both, and I think it's one of the... again, one of the things that attracted me to this business and the combination of Quidel and Ortho into one company.
Mm-hmm.
you know, the ability for us to participate fully in both centralized and decentralized across every stage of patient care. Yeah, I think you know, healthcare is moving to a great extent toward the patient to meet the patient where they are. And with this combined business, we're able to do that. That said, I think there are still great opportunities in centralized testing, where you have the opportunity to drive significant efficiencies and cost reduction for patient, which for the patients and doctors, where that is important in delivering care. So again, this ability to touch the patient across the entire continuum is hugely important, and I think again points back to the logic of combining the two companies.
During the recent earnings call, you noted your combo flu COVID test exceeded 50% of respiratory revenues compared to standalone tests. This mix shift from standalone to multiplex tests echoes the trend seen by some of your diagnostic peers as well. How should we think about this mix in steady state, and what are the margin implications?
Yeah, the combo test has been one of those tests that's actually been great for the entire respiratory space. It's been one of those rise to the tide sort of assays that's come out since the pandemic. For us, we've reported on this, I think, every quarter for the last probably almost two years, the percentage of combo testing of our total testing revenue, respiratory testing revenue, and it's been pretty consistently above 50%. The real point is, and I think you mentioned it, is that it's a durable product for us. We believe that it is here to stay.
You know, there was some, I think, some thought previously that as the pandemic moved into endemic stage, that that combo test would start to wane a bit, but we have not seen that happen, and it, you know, it does carry slightly better margins than the Flu A/B only test.
...But again, you know, we see not only the sale of the product being durable, but also the price has been pretty steady, too. There's not been a lot of movement on price. So we do expect that to continue. As you see prevalence of both COVID and flu in the space, you know, we think that combo test will continue to be used by the docs.
Any early color on how this year's flu season is shaping up?
I don't know that we've really seen much other than what's happened in Australia and South America from a flu season standpoint. It's looking pretty typical there, I would say. You know, we've seen a nice spike in COVID testing, which, you know, has driven some good results for us here over the summer. But we're still a little early for the rest of the respiratory season to really understand what that might be shaping up to look like here as we go into the fall.
Switching to transfusion medicine. The business had been roughly flat for the first six months of 2024, partly driven by wind down of the U.S. donor screening business, which was about 20% of the segment in 2023. You guys have number one market position globally in immunohematology here. Post wind down of the donor screening business, how do you think about growth and margin profile for the segment? And strategically, do you think it makes sense to continue to invest in the portfolio?
Yeah, so I think I really like the immunohematology business. It is a lower growth business, but I think with the work that we're doing on the profitability side of our business, as well as some investment in new platforms, we may be able to accelerate the growth of the business, you know, as well as impact the profitability. And it has a really nice overlap in the hospital segment with our traditional labs business that enables us to leverage our resources in that area. So I like that business, and we're gonna be looking at improving it, both in terms of profitability and growth over time.
Great. And then moving on to margins. Beyond the $100 million in savings from headcount cuts you already announced, you flagged supply chain, IT, procurement, and also further opportunity to cut costs. Which of these do you view as the most impactful levers of margin expansion you can pull in the next 18 months?
Most of what we have identified in terms of the $100 million full year savings that we've identified this year has been in the area of staffing. That continues to be a big opportunity for us. So as we identify our next steps, that will be an area of focus. But we're really moving beyond that and looking at really every aspect of the cost of our business, from, you know, the cost of our products, which represents a huge portion of our cost structure, to services, logistics, supply chain. You know, we are trying to do what we can not to impact our customer-facing resources to the best extent we can.
We wanna make sure that we maintain that positive customer experience, but, you know, really, as I've said before, there's no stone being left unturned here. We're looking at every aspect of our cost structure as we move forward.
How confident are you that you can reinvigorate the top-line growth and execute on the Savanna launch, while also increasing your margin to that mid to high twenties level you talked about in the next couple of years? Is Savanna upside a requirement to get there?
Savanna, clearly, as I mentioned, is our single biggest opportunity for growth in the short term. You know, that said, given our experience here over the last year, you know, I would say that I'd like to say we're on the clock with Savanna, right? We have to be successful with the respiratory panel and the STI launch. We have to gain traction with that platform, and I'm confident that we will. Should, however, something not go the right way, we will reevaluate the platform, and in either case, it will become an opportunity for margin expansion in the company, as today I think we're what about two hundred basis points of margin impact from the investment in the platform today.
At this point, I remain very optimistic about our opportunity to get this over the finish line and drive the platform from a gross growth standpoint.
Okay. And I wanted to dive into some of the capital allocation priorities for you. You talked about, in the past, about prioritizing paying down debt, about $2.5 billion, and I think about $2.3 billion in the term loan is floating debt, and about $500 million is unhedged. There have been some positive signal that indicate Feds might start cutting interest rates soon. Do you anticipate Fed interest rate cuts changing your debt paydown strategy?
Well, you mentioned the amount of the debt that we have hedged in terms of fixed versus variable rate. And, you know, just to put a percentage on that, we're about 75% hedged to be fixed rate. And so if you look at our all-in interest rate right now, it's a little over 5%, so not really a bad place to be. So as rates do start to come down over the next several quarters, as everyone expects, there will be some tailwind for that, but I wouldn't expect it to be too significant, again, since, you know, about 75% of our debt is already fixed. You know, we will continue to focus from a capital allocation strategy to bring down those debt levels.
You know, the leverage ratio, where it is right now, is really not where we want to be for a company our size. You know, we wanna get it down, you know, about a turn to maybe three-quarters of a turn, I would say over the next, say, twelve months, eighteen months, for sure, to get the leverage ratio down to where we wanna be. So as you think about how we're gonna spend our capital, I would say at this point, it, there's probably gonna be a little heavier focus on debt paydown as we move through the next several quarters.
Not that we're gonna ignore business development opportunities, but I think anything we might do from an M&A perspective would be more designed as partnerships, licenses, distribution agreements, things like that. There's certainly no desire to take the leverage ratio up any higher than where it is right now.
Got it. And assuming free cash flow turns positive in the second half, how are you thinking about opportunistic share repurchase opportunities? You just talked about debt paydown being a priority, but you had a $300 million stock repurchase program expiring mid-August. Do you anticipate issuing a new program in the near future to replace the program?
Yeah, I don't think that's likely an area we're gonna focus on right now. You know, you can never say never. You know, we have to remain open and nimble and, be aware of the circumstances. But I think where we sit right now, probably not an area we would dive into too deeply, but again, we'll stay open if the situation were to change.
At what point do you anticipate holding an Investor Day and laying out both your vision and long-term targets for Quidel in the future?
Yeah, we are interested in hosting Investor Day. It's really a matter of timing for us. I think initially, we were thinking we might do one toward the end of this year, but I think that's becoming a little unrealistic, just given the things we have to accomplish and the work we have to put together. So we'll be trying to define a time for an Investor Day sometime, I would say, in the first half of 2025.
Okay. In the last couple minutes here, in closing, what would you think is the most important thing you want to highlight to investors as we head into 2025?
I think the things I would highlight would be the fact that, you know, our business right now is, first of all, first and foremost, focused on satisfying our customers at the highest level. We've worked through a number of things historically that have gotten in our way there, and we're well-positioned, you know, from a product portfolio standpoint and from an execution standpoint to do that. Second, I would say we have a clear line of sight on our cost structure improvement objectives, where, you know, we have, I would say, very clear line of sight to Adjusted EBITDA margins in the mid- to high-20% range over the next couple of years.
You know, as I've looked at the business, coming in, compared it with benchmarks, looked at it in terms of businesses that I've run in the past, there's nothing structural in our way to achieve those levels of profitability with this business. Most of what we have to do here is under our control, and the business is really focused on getting that done, and we've identified already a significant portion of what we have to do there. I would say, third, we are, you know, laser-focused on the things in the short term that will mean the most to the business in terms of growth.
So getting Savanna across the finish line with, you know, a great value proposition, and completing the menu on that instrument, addressing a number of our product lifecycle objectives, and then, you know, looking forward to additional investment that we're making in menu expansion and new platforms. So, you know, with that focus, I think, and with the improvement in profitability, you know, I think the future for this business is quite bright. We have a lot to execute on in the short term, and I know everyone will be watching.
With that, thank you so much again for joining us today.
All right. Thank you. Thank you.