All right, good morning, everyone. Thanks for joining us. I'm Tom Peterson. I'm an associate on our Life Science Tools and Diagnostics team here at Baird. We're excited to have Quidel Ortho presenting today, and representing the company, we have CEO Brian Blaser and CFO Joe Busky. Thank you both for joining us.
Good morning.
Thanks, Tom.
Thanks for having us.
Yeah, so before we begin, just a reminder to everyone, to refer to Baird's website for important disclosures about what we're discussing. And as far as the agenda today, I think we're just gonna hop right into Q&A. If anyone has questions from the audience, please feel free to submit them through the web portal. Brian, I wanted to start with you. You're relatively new to the CEO role here at Quidel Ortho. So I wanted to get your thoughts as to, you know, what kind of drew you to the opportunity set, for the company, and how do you think about, you know, the market opportunity and future growth drivers as you get into the CEO role?
Yeah, so I've been with the company now for, I think, a little over four months, and, you know, I was happily retired prior to this, but when this particular opportunity came along, I... Literally, when I was called, I said, "You know, when can I start?" because I find the combination of Quidel and Ortho to be, you know, a very compelling combination, where we have now a company that can touch every stage of the healthcare value stream, participate fully in both centralized and decentralized testing.
You know, as I've come into the business, you know, I appreciated this a little bit when I was doing my due diligence, but as I've come into the business, I think the one thing I'd like to leave with all of you is that, despite the fact that there was maybe some misalignment with COVID revenues last year and a disappointment with the launch of the respiratory assay for Savanna, the underlying business here is stable and growing. You know, the Labs business is a very solid, durable growth business. It's got long contracts, five to seven years. You've got, you know, maybe 10%-15% of those contracts come up every year. We have very high renewal rates. We have a positive win-loss ratio on new business.
And so the underlying core of the business is quite stable. You know, what we have found obviously, though, is that, the cost structure is misaligned, and so we have a lot of work underway at this point, to address that. And, you know, fortunately, even before I got to the business, the Office of the CEO had leaned into that work, identified, a lot of the savings that we needed to generate, and has made good progress on, the execution of that. So, you know, it's a very... I think it's a very compelling opportunity. Still a lot of work to do, and as I've said before, there's, you know, no stone being left unturned here as we go through the process.
Yeah, fantastic. I think we'll get into some of your priorities and cost realignments here as we get into the presentation, but I wanted to start up front with the lab business. You know, it's been flattish in the first half of 2024. You know, how has that compared to expectations and, you know, how should we think about the growth outlook in the back half of the year?
Yeah, I think it's flattish if you look at it in total, but there's a kind of a year-over-year comp there with our instrument situation, where we had a significant backlog of instruments that resolved. When you strip that away, it's really a solid mid-single digit growing business, and again, kind of supported by the underlying business model there with, you know, long contracts, you know, high retention rates, et cetera. And kind of along with that, the Immunohematology business, you know, a little less higher in terms of growth rate, but again, a very stable business, durable growth business.
Maybe talk about the mix between clinical chemistry and the immunoassay pieces of those, of the Labs business specifically, and on the immunoassay growth opportunity, just how are you evaluating the growth factors here, and how do you think about, you know, penetration of that as-
Yeah
... from a mix perspective?
Yeah, it's actually an advantage from my point of view. Our mix in terms of clinical chemistry only instruments versus integrated clinical chemistry and IA is kind of shifted a 180 degrees from the industry norm, which would have, you know, maybe 70% integrated instruments versus 30% standalone clinical chemistry. We're exactly the opposite of that, and we're driving now an approach to place more integrated instruments, which will give us access to a higher growing immunoassay market. That market tends to grow, you know, in the mid to high single digit range versus clinical chemistry, which is low single.
So, that gives us a benefit in terms of our ability to grow, but also profitability, as the profitability of the immunoassay tests are much higher than the clinical chemistry tests.
Do you think long term that that mix kind of normalizes more to market, where the market is, and that flips?
I think it does, but I think it's gonna take a long time.
Sure.
I mean, if you, if you look at us five years ago, our mix of integrated instruments versus standalone, instruments was maybe 20%.
Mm.
Today, five years later, it's 30%, so we have plenty of runway there to, you know, continue that trajectory.
Sure. Maybe touching on China specifically, this has been an area where growth has been more solid here, and I think high single-digit growth for 2024 is kind of the expectation. So, you know, why have you been more successful here? Do you think this growth profile can continue, and, you know, do you think there's any impact or potential impact on the business from VBP?
... Yeah, so China is roughly 10% of our business today. It's a nice market for us. I think, you know, we're solidly high single digits with that business today. If you look at our latest results, we're right in that range when you strip out some one-timers. You know, part of our ability there is we are under-penetrated relative to other competitors, so there's room for us to grow and keep that growth rate high. And then, you know, our clinical chemistry dry slide technology has not been subject to VBP at this point.
The focus of the government has been on wet chemistry and more immunoassay, and at this point, we don't see, you know, that being impacted anytime soon, although, you know, we monitor that very carefully, obviously.
Sure.
Yeah.
Let's maybe flip over to Savanna and the developments there. I think you've characterized this as getting it across the finish line. It's a real focus initiative for you, but can you just kind of walk us through the Savanna instrument profile, kind of your thoughts on the current status of that development, and, you know, how are you assessing the competitive dynamics of this market aside from sort of menu expansion? You know, what are the key areas of differentiation that you see for the system?
Yeah. Well, there are really three things that you have to have with a point-of-care instrument like Savanna. You've got to have a very easy-to-use system. So in the case of Savanna, it is truly, you know, sample in, answer out, as compared to some of the other platforms out there that require some level of either cartridge assembly or sample prep or something up front. The other thing you have to solve is turnaround time. So, you know, under 30 minutes is really kind of the benchmark, and our rapid thermocycling in that instrument allows us to achieve that.
And then cost, obviously, is hugely important, and we think just based on the way the cartridges and the assays are designed there, we're gonna have a significant price advantage to our customers, which ultimately allows them to create a nice business. And, you know, so then the question becomes, well, there's a lot of platforms that have already been placed on the market today, and we have, you know, extensively surveyed our customers, and, you know, they're telling us, "Yes, we'll switch for the right value proposition here." Really, the switching costs here are quite low. These are relatively low-cost units, that'll be on a reagent rental-type model, so there's no real capital outlay for the customers, and the training burden for this system is very low, just based on the ease-of-use profile.
So, you know, by and large, our customers have told us that even though they may have invested in one or two or maybe three platforms, they're willing to look at Savanna as an alternative. And I think the other thing that helps supports us here in the launch is the fact that a lot of the platforms that were placed on contract during COVID, those contracts are starting to expire now, so it's kind of a nice time for us to, you know, enter with Savanna.
Yeah. Great,
And if I could, two other points.
Sure
... on the Savanna U.S. launch I'd like to get across. One is that we already have the box and one panel approved in the U.S. that's HSV-VZV, which is essentially the herpes, shingles, virus test panel. So that box is approved. We, you know, we are placing boxes. We also have the box and the respiratory panel approved CE marked in Europe, so we're placing boxes. So I don't expect there to be a lot of hiccups with the U.S. launch in terms of bugs, if you will, in the system or in the box itself, because we already have the box approved. The other important point I want to make is that the legacy Ortho commercial team is gonna be the team that's gonna sell this product.
So it's not like we have to bring in a whole new team and incur a lot of sales and marketing expense to introduce this product. We already have the team in place, and they're ready to sell it.
Yeah, that's really helpful color, and I wonder if you have any thoughts on initial feedback that you've gotten as you've placed some of these early instruments both in Europe and here in the U.S. And then, I wonder, at a higher level as a management team, how you're tracking and evaluating what success means, and how you're defining that, you know, in the early year of launch?
Yeah, well, I think our customers, by and large, are supporting the value proposition in terms of their feedback. And, you know, as we go forward with the launch here, you know, first, we have a ways to go. We've got to get through our clinical trials with the respiratory panel, you know, and then, you know, follow that on with Sofia. You know, we'll be looking at a number of different factors. Obviously, the adoption by customers and, you know, the placement of instruments, but also, you know, the revenue ramp that's supported by the menu expansion, and so we'll be monitoring that very carefully, like we would with any other product launch.
Yeah, any updates to the RVP4 assay and just how important you think that is, over the medium term?
Yeah, well, I think over the medium term, it's... I mean, it's a table stakes type of assay, right? We really need that assay in order to start to support broad placement. We'll be entering clinical trials here, starting later this fall, with the respiratory season going into next year, and we expect to have that assay on the market in 2025.
Any other key areas of menu expansion for Savanna that we should be thinking about, you know, over the next year?
Yeah, so we also have an STI panel under development that we will have on the market, wanna have on the market in 2025. And then, we're following that up with a GI panel that will have both the bacterial, viral, and a parasitic vector combination of tests.
Got it. Maybe let's shift over to Sofia. I wanted to touch on a point that you made at the beginning, which is this shift from central lab testing to more point-of-care applications, and I wonder, as you think about the market overall, you know, how much of a growth driver do you see as this dynamic? Is it more of a mix shift, or do you think it's really something that's driving growth, you know, over time?
I think, you know, the health system kind of moves in two directions. It moves toward the patient and tries to meet the patient where they are, and in which case, we have a great offering like Sofia, and we'll have, you know, Savanna to, you know, support that. And then, to drive efficiency, you know, central lab testing is very important. So I don't know that it's necessarily a migration of testing that is occurring from the central laboratory to the point-of-care. I think it's meeting the patient where the patient is and where they'll benefit most from the different mode of testing.
That's really helpful. Maybe getting into flu: I think the combo product was over 50% of 2Q flu revenue. So how are you thinking about this mix over time and, you know, what we would consider a typical flu or respiratory season?
Yeah, I think. And I'd ask Joe to, he's got maybe more history than I do here, but I think we continue to see that predom-
Mm-hmm.
That mix shift continue to more of the combo testing. And so far, you know, what we're seeing are continued, very strong, durable results with the test.
Yeah. Yeah, we will likely continue to quote that on every earnings call, 'cause it's been pretty consistent for the past several quarters, where that percentage has been over 50%. And the point is, that you've made, Tom, is that it shows that the test is very durable. We don't think it's going away. The docs are still using it quite a bit with their patients.
Yeah, maybe to that.
Mm-hmm
... point and line of question, I mean, what, what's the right way to think about endemic COVID or respiratory testing? You know, are we close to that point here in 2024? And how are you thinking about that over the next couple of years as the market sort of normalizes?
Yeah, I don't think anyone really knows.
Yeah.
We've, as you know, kind of scaled back our expectations for COVID testing. I think, you know, we are approaching kind of this endemic level, and we're kind of seeing, you know, patterns recur, where we have a summer spike, and then we have a you know other spike in the respiratory season, but you know, we're just gonna have to continue to monitor that and do our best, you know, in terms of calling COVID. That's gonna be the biggest challenge in terms of calling our results.
Yeah, sure. I don't think you're unique there, and maybe some challenges in forecasting COVID and COVID testing. But any potential near-term impacts from recent government programs, initiatives around, you know, free COVID testing, is that affecting your view on COVID revenue for 2024?
Yeah. So we were awarded a significant contract in 2023 for, I think, close to eleven million tests. We're continuing to supply those tests. I think we ship close to a 110,000 tests a week to the government for that. I don't think what the government has announced is gonna result in any additional material supply for, from us.
Yeah
... for those needs, but, we are participating in that. I think that contract expires for us in 2025.
Okay. That's helpful. Any comments on the current flu season, insights from Southern Hemisphere, and how you think this is shaping up relative to a typical season?
Yeah, I would say it's shaping up to be a very typical respiratory season.
Mm.
When you look at what's happened in the Southern Hemisphere thus far, the peak of the respiratory season already hit, and that peak was above the five-year average. Excuse me. So it does seem like the season in the Southern Hemisphere is tracking to be at least an average to slightly above average season. The big wild card now is the duration. How long does it go out? That's, you know, that's the piece we just don't know yet. So I would say that based on that information and based on what we've seen, based on what we're hearing from our distributors in the U.S., it does feel like things are shaping up to be a typical or fairly average respiratory season. And I would just add with the...
Coming back to the COVID revenue again, at the beginning of the year, we put out a stake in the ground of $150 million of annual COVID endemic revenue this year, and I would say through the first half of the year, we're about halfway there, so we're tracking well towards that $150 million. So it does feel like we've got a pretty good estimate there for the full year.
Got it. Maybe let's take a step back. You recently decided to unwind the U.S. Donor Screening business as part of some portfolio rationalization. You know, do you see other areas of potential portfolio rationalization across the business, and how are you evaluating that as you look at sort of the mix of the portfolio?
Yeah, I think, well, at first I'd say exiting the Donor Screening business was the right move coming out of COVID, and just given the competitive situation with that business, and we'll fully exit that business by the end of 2025. You know, I've looked at the portfolio, and at this point, and there are some small, very small things that we might take action on, but by and large, I like the portfolio. I like the Immunohematology business in transfusion medicine as a complement to the Labs business. There's a lot of overlap there with commercial synergies.
You know, I think our focus is gonna be on improving the profitability of all of our businesses and then, you know, doing some menu refresh or menu expansion and platform refreshes to improve the competitiveness and see if we can elevate the growth of each of these businesses.
Got it. That's helpful. I mentioned at the beginning, you know, some of the initial cost actions that you've taken as CEO, you know, about $100 million-
Mm
... of full-year cost savings in 2024. Can you give us just kind of an overview of where those actions occurred, and how they're informing your future areas of strategic investment in the core business?
Yeah. So yeah, we've identified $100 million of annualized savings. But I would say most of the-
... the initial savings was from staffing. So, you know, we took a roughly 7% reduction in our staffing, which kind of monetizes out to around 12%, just given the fact that we targeted probably more senior level positions, higher level roles in the organization. We're continuing. We'll continue to have some additional staffing adjustments as we go through the end of this year and into next year, but we'd like to get those behind us as quickly as we can.
Our next phase of targeted savings really is in the non-staffing areas, where, you know, we're looking at everything that goes into our products to, you know, all of our OpEx costs, you know, travel, entertainment, services, supply chain, logistics, you name it, really across the P&L. We're being a little bit cautious in terms of how we communicate where we're at on that because we wanna make sure that, you know, we've got it defined and, you know, actionable plans identified before we, you know, commit to those numbers.
Yeah. No stone unturned-
That's right
... as you said. Joe, you talked about, you know, progressing back to kind of the mid to high twenties from an Adjusted EBITDA perspective. So, you know, give us a sense for how you see progression towards that target. You know, how are you thinking about revenue growth and sort of reinvestment in the business? And, you know, where in the P&L do you see opportunities to increase margins?
Sure. So, as we've said, we believe the path to the mid- to high-20s Adjusted EBITDA margin will take two to three years, and we will make progress in 2025. So I do expect that the margins will improve as we move from 2024 to 2025. Exactly how much improvement we get, we'll probably hit more of that as we move to the later part of this year or early next year, and we give 25 guidance. I think that the improvement will be across all areas of the P&L. We should see improvement in the gross margin. We should see improvement in the OpEx as a percentage of revenue. As Brian said, we're hitting all areas, whether it's direct costs or whether it's indirect cost.
So it's really us as the leadership team trying to instill a continuous improvement culture within the company. This isn't just a one-time thing. We're gonna take some costs out now. We've already started to. We'll continue. We'll talk more about it as we move through and execute it, but we really want it to be a continuous improvement culture, and you know, we continue to find efficiencies and keep those margins up where they should be for a company in the space that we're in.
Got it. I wanted to shift over to capital allocation and the balance sheet. You had to draw on the revolver in 2Q. You talked about the overall leverage profile. Can you just walk through your level of confidence for ending 2024 at, you know, flattish leverage? I think you're about three point four times on, on a pro forma basis right now. So how are you thinking about that and your capital allocation priorities as it comes to, debt, the debt pay down?
Yeah. So the first half of the year was not a great cash flow half of the year for us. It was as expected and really driven by two things: one, seasonally lower revenue in the first half of the year, particularly Q2 is a low revenue quarter for us seasonally, and then the cost improvement actions really weren't executed until the very end of Q2, and so we really didn't get the benefit of any of those cost improvements in first half. We'll get them more in the second half. So we did draw on the line.
For the second half of the year, we do expect revenue to be seasonally higher as we move through the respiratory season, and we do expect, again, those cost improvements to have an impact in the second half of the year. We expect cash flow, recurring free cash flow, to be positive in the second half of the year. In fact, we expect recurring free cash flow for the year to be positive, which will allow us to pay down a good chunk of that revolver that we borrowed in the first half of the year. As far as the leverage ratio, yes, on a pro forma basis, we do expect it to be right around where it was at the end of the first half, which is, like you said, about three and a half times levered.
On the face of the balance sheet, though, the leverage ratio is a little bit above four. Now, that's not a place where we wanna be with the leverage ratio. We wanna bring that down. And so as you think about capital allocation strategies and priority, priorities, we're gonna be a little more focused on debt paydown for that reason. We wanna get that leverage ratio down below four, into well into the threes and be able to bring it down at least a half a turn as you move through 2025. So we will look at things like share repurchase or M&A, but I would say those things are a little bit of a lower priority right now in the near term as opposed to debt paydown.
Got it. That's, that's really helpful. Do you have any high-level thoughts about where sort of that recurring free cash flow number tracks into 2025, and, and how you're thinking about that over the medium term?
Yeah, where we should be as a company is that the recurring free cash flow should be between 50%-60% of adjusted EBITDA or greater than 100% of our net income. We were there the last couple of years. We fell backwards this year, and again, we're in the second half. I think we'll start to approach those numbers, and we hope to get back to those targets in 2025 and 2026 as we execute on the margin improvement initiatives.
Got it. That's really helpful color. With a couple minutes left, I wanted to get your thoughts on potentially restoring financial guidance. It was suspended as part of the 1Q update. So any incremental thoughts on sort of the guidance timing and, you know, Brian, what are your overall kind of guidance philosophy and guiding principles as you think about, you know, maybe restoring that potentially into 2025?
Yeah, we'll be looking to restore guidance in Q3, with Q3 results here. And, you know, my philosophy is to provide guidance that is, you know, achievable, realistic, that where, you know, where we're in a situation where, you know, we will perform to the guidance that we provide. You know, we need to be more reliable in that regard, and that's definitely a focus of mine.
Got it. Without giving a formal guide for 2025, can you just walk through some of your prior comments that, you know, going into 2025, that this is a mid-single digit plus growth business, if you kind of back out COVID and the U.S. Donor Screening? And, you know, are there specific areas of the business where you feel confident you can grow at mid-single digits or better?
Well, I think you just, again, you look at the underlying business model of our Labs business, which again is supported by all the things in the business model I mentioned: long contracts, high renewal rates, a positive win-loss ratio. You know, it has been a little noisy here with some one-time items that have been working its way out, but that is, you know, clearly mid-single digit business. The IH business is a low single digit business, and then, you know, you layer on the respiratory element to that, and I think you've got a business that is kind of in that mid-single range. But, you know, we'll be providing more color on that with the Q3 guidance.
Sure, yeah. You know, how dependent do you think the medium-term growth outlook is on the Savanna success and the menu expansion and hitting those time frames?
Savanna, Savanna is critical for us in terms of elevating our current growth profile, and it's the biggest single thing that we can do in the short term to elevate our growth profile beyond the mid-single digits, and that's why, you know, along with the value proposition that I talked about, that, you know, we're committed to getting that across the finish line and making that a successful product.
Got it. Well, we're under a minute left, so I'll end with one final question, which is just, you know, what do you think are the most underrated aspects of Quidel Ortho's business and how you see the opportunity set?
I think, again, it goes back to the power of the combination of the businesses and the ability to, for us to touch, every aspect of patient care along a patient's journey. That ability to participate in both centralized and decentralized testing, and just the underlying strength of the business model here, that you know that supports the business. We have work to do, clearly, on the cost structure, but, you know, the underlying business is stable and growing, and I think as we improve the cost position, you know, we're, we're gonna be well prepared for the future.