Go ahead and get started. I'm Catherine Schulte. I cover Life Sciences and Diagnostics here at Baird. Very excited to have QuidelOrtho joining us today from the company. We have the CFO, Joe Busky. So, Joe, thanks so much for joining us. W e're going to dive right into Q&A. So if anyone has a question, feel free to send them to session3@rwbaird.com, and I will pass them along. So, Joe, I thought maybe we could just start at a high level. Can you just talk about key takeaways from the quarter and maybe how your strategic vision for the company is unfolding here?
Sure. And by the way, thanks, Catherine. Thanks for having us to the conference. It's been great. And as far as that first question on highlights from Q2, I would say that we've now had two good quarters in a row to start off 2025 with good margin improvement of 400-plus basis point margin improvement over the prior year. W e also showed that we've made some strategic decisions in line with what Brian and I said we were going to do 15 months ago when he started. And examples of that would be we announced that we're closing a very large manufacturing facility in Raritan, New Jersey, which is going to provide some real nice operating margin improvement in a couple of years.
We made the decision to pivot from Savanna development of molecular product to LEX, which is a business in the UK that we're going to purchase once they get FDA approval for their first respiratory panel. Again, these decisions are just all around margin improvement and making the company more productive and more efficient. Again, things that Brian and I said we were going to do last year when he started. I guess the last thing I'd mention is that the base business continues to grow at the rate which we said it would grow, in that sort of the mid-single-digit growth for labs and immunohematology.
Yeah. I want to get into LEX in a bit, but maybe starting on the lab side of the business. To your point, recurring revenue growth remained solid to start the year. Where do you think you're winning in the clinical chemistry business?
Yeah. The strategy with Labs continues a strategy that was started probably about five or so years ago, and that is to focus on the small to mid-size hospital and labs, which we define as our sweet spot. We're doing quite well there. I would say the other strategy is to focus on leading with integrated analyzers that run both routine chemistry and immunoassays, and that strategy continues to be the one that we're going to employ, and it's working quite well, and the growth in the Labs business continues to be right where we said it would be in that mid-single-digit growth range.
What about on the instrumentation side? How's the current capital equipment environment?
Yeah. I don't see a lot of impact of customers pausing on placing analyzers due to the macro. I t's mainly because the value of the analyzers we're placing is much less than, say, an MRI or imaging piece of equipment that's $ millions and $ millions. O ur purchase, the equipment purchases that our customers are making, kind of fly below the radar to some extent. We also offer, like our competitors do, an alternative to buying an instrument. That is a reagent rental where we can place an analyzer at a customer location and charge them the cost of the box over the life of the contract in the form of a surcharge on the consumables. That's a way of kind of getting around maybe CapEx limitations that a customer may have.
How important is the automation element to customers? How has your integrated analyzer kind of helped in this environment? I think it's around a third of your installed base now. So how do you think that will track over time?
Yeah, for sure. Automation and the integrated analyzers are super important to our customers and to our strategy of growing the labs business. In fact, if you look at the automation, or I should say the growth in the automation and installed base over the last several years, it's typically been in the high single digits and low double digits as indicative of the strategy working. We continue to lead with that integrated analyzer, which is going to drive more higher margin immunoassay revenue growth for us. And that's important because if you look at our business relative to where the market is, our mix of immunoassay and routine chemistry is inverted from where the overall market is. And so there's lots of room for us to grow that immunoassay side of the business.
In fact, if you look at our percentage of installed base that's integrated versus non-integrated, if you go back to when Ortho Clinical Diagnostics went public in 2021, we were around 24% of the base was integrated. Now we're sitting at around 30% of that installed base being integrated. You can kind of get a feel for the pace of which we're moving and employing that strategy. You can also get a feel for how much room is left to run, how much we can run this strategy out. There's plenty of runway left.
In terms of that kind of immunoassay mix, I guess, where do you see the biggest opportunities in the portfolio to keep driving that?
Yeah, good question. I f you look at where the labs growth is in the more developed markets of the US and Western Europe, you'll see more low- to mid-single-digit growth. But when you look in less developed areas like Latin America and Asia-Pacific and Eastern Europe, you'll see more high single-digit, sometimes low double-digit growth. And so I look towards those lesser developed markets of Eastern Europe and Asia-Pac as the areas where there's lots of opportunity for us to grow that integrated analyzer base and grow that immunoassay business.
If we move on to molecular, how does the planned LEX acquisition kind of expand your footprint there and maybe talk through the strategic rationale for pursuing that route instead of continuing with Savanna?
Yeah. It was a really tough decision that we made back in June to pivot from developing Savanna to LEX. Savanna had been a product that Quidel had been working on prior to the combination with Ortho for many years. And it's a great product. Savanna, has a lot of potential competitive advantages in the marketplace. But LEX also has some very distinct competitive advantages in the marketplace where we intend to sell it. And those advantages, I would say, are focused on turnaround time, ease of use, and cost.
The decision was made to pivot to LEX primarily because if you look at the amount of time it would take to fill out the menu, the amount of cost it would take to fill out the menu, and the level of technical risk, which is much less in a product like LEX, we decided to discontinue Savanna and focus our resources on LEX because, again, we think we can get that menu filled out much faster and for much less cost at a lot less risk. We believe that the first panel, which was submitted to the FDA, which is a respiratory panel in June, we believe that we will get approval for that panel sometime later this year.
Maybe what's the timeline for menu expansion there into other respiratory or women's health applications? Just curious how much there is an opportunity outside of that initial panel.
Yeah. There's lots of opportunity to fill out that menu. F irst we'll focus on RSV and Strep being added to the panel. And then women's health and STI will be next. More to come on specific timelines. But yeah, there's plenty of opportunity to fill up that menu and expand.
How do you think about the overlap with kind of the rest of your portfolio? Is there any potential cannibalization for Sofia?
The good news is that the LEX product can be commercialized through the existing sales force. So there's no need to add any resources to commercialize LEX as we move into early 2026. Based on the customer research that we've done, the KOLs we've talked to, we believe there's plenty of room for both a rapid antigen test like Sofia and a molecular product like LEX. And there is some overlap, but I would say it's not significant at all. It's probably 10% or less of overlap. And even that amount of overlap is not overly concerning for us because if there are customers who'd rather use LEX rather than Savanna, the LEX margins are higher. And so that would be some minor amounts of cannibalization that I'd probably welcome from a margin perspective.
Yeah. And you've talked about kind of reinvesting some of your Savanna dollars into LEX. Where are those investments mainly concentrated this year? And kind of what additional steps are you taking to prepare for that kind of limited commercial launch in the first half of next year?
Yeah. We're definitely excited about getting approval on that first panel later this year so we can start a limited commercialization in this first and Q2 of 2026 respiratory season. As I said a minute ago, really no need for any additional commercial resources. We've got everything we need. Being the leader in respiratory testing in the U.S., we've got all the commercial resources that we need to sell that product. I guess the most near-term investments might be in the form of not too significant CapEx that will be needed to increase the manufacturing capacity for LEX. There is a line that the company has in the U.K. right now, but we'll need an additional line either somewhere in the U.K., again, or in the U.S. We haven't decided that yet.
But that'll be something that will stand up pretty early in 2026 so that we can hit the late in the 2026, early 2027 respiratory season with a much more fulsome rollout and commercialization.
Yeah. Okay, and then on Point of Care, you lowered the 2025 outlook for COVID revenue coming out of the Q2. Can you just remind us of the seasonality baked in for the third and Q4, and maybe just given the trends that you've seen so far this year, how you think about forecasting endemic COVID revenues longer term?
Yeah. COVID's been quite the ride. And I know that there's been a lot of focus on the decline of the COVID revenue over the last several years. But I do believe that as a headline conclusion, we've digested most of that decline. When you think about where we were in 2021 and 2022 with $1.4 billion of COVID revenue that's dropped to $400 million and then $185 million last year, the guidance this year is for $70-$100 million. And if you just pick the midpoint of that, somewhere in the mid-$80s that's a realistic, very realistic point of where the declines. And I can say that with some confidence because all of the government order revenue is gone. And the retail business is fairly small. At this point, there's not a whole lot left.
So most of what's left is the professional use space revenue, which has proven to be somewhat consistent and durable. And so we do think that that midpoint of the 70-100 is probably a good place to think that not only we're going to end up this year, but where we're going to go for the next several years with COVID revenue. A ll of these views of revenue of ex-COVID that we've done for the past couple of years, we're really getting to the end of that, which is great news, I know, for the buy side and sell side.
Yeah, absolutely. Maybe any thoughts on the upcoming flu season? Are there any clues from the Southern Hemisphere around what this upcoming season could look like relative to historical trends?
Yeah. The flu season in the Southern Hemisphere is always a good data point for us, and that flu season has turned out to be one that I would define as more typical or average, and so that's good because that's what we've said all along this year is that our guidance for flu revenue is going to be a typical or average season. And we define that as a flu season in terms of volume, 50-55 million tests, and the combo test mix being greater than 50% and steady market share. So the new model that we've gone to project the flu revenue that we went to in 2024 is proving out to be a good one. We were very close, almost, I would say, spot on to what we guided the street to for the first half of the year for flu revenue.
And so we have a lot of confidence that where we are for the second half of this year is going to be pretty close as well. And what we're seeing is that the patterns for the flu season are getting back to more predictable pre-pandemic patterns. The level of testing is up versus pre-pandemic mainly because of the combo test. And we think that combo test is pretty durable given that it's been over 50% of our flu revenue now for two-plus years. I think that the flu season revenue is getting a little more predictable. So we feel good about where the guidance is for the second half of the year.
Yeah. Maybe shifting to Transfusion Medicine. How should we think about that business following the U.S. donor screening wind down? And what's your view on the growth outlook there?
Yeah. So as a reminder, the Transfusion Medicine business unit for us is comprised of the donor screening business, which is primarily the business of screening for infectious disease in the blood supply donations. And we decided to wind down that business last year because it is a small market. It's lower growth. And it's got lower margins compared to the rest of our businesses. So we decided to wind it down last year. And last year, we did about $120 million of revenue. This year, it'll be probably around $40-$50 million of revenue. And this business will be fully wound down in early 2026. And so again, that revenue headwind of the donor screening wind down, which we've had all year, it's down about 40% in the first half of the year. That headwind will go away in the first half of next year.
And we won't be dealing with that anymore. And the top-line revenue growth will be made up more of the base business, which we see as a mid-single-digit growth business. The other business within immunohematology or Transfusion Medicine is immunohematology. And that's a business that we really like. That business is global. We're the global number one in terms of market share with that business. And we do intend to continue to invest in that business going forward.
Yeah. Okay. And maybe on China, there's been a lot of noise there for diagnostics companies, particularly this quarter. It sounds like you've been relatively insulated from some of the unbundling and VBP headwinds that others are seeing. Is that right? And are there any parts of your business that are seeing pressure there?
I was waiting for the China questions. I knew they were coming. We spent a lot of time on this on our last earnings call. Brian, I think, did a great job of talking about why our business is different from others in our space in China. And I know a lot of folks like to paint a broad brush with the China risk. But our business is different. H ere's why. First of all, we use a dry slide technology on our lab side, which none of our competitors do. T he volume-based procurement initiatives have provisions in them that say that any impacts have to be to competitive businesses. S ince we're the only ones using the dry slide technology, our business is not deemed competitive. And so it's been outside of the volume-based procurement initiatives for the most part. That's the first thing.
The second is that most of our business in China is routine chemistry in stat environments or urgent care or emergency rooms. And a lot of the other initiatives around reimbursement changes and the unbundling initiatives to control healthcare costs have been focused on the immunoassay side of the business. And so our business, again, not immune to these impacts, but it's been less impacted than others in our space. And so we will obviously keep a very close eye on China. It's a very complex place to do business. But at this point, the impacts to our business have been much less than our competitors have seen.
Yeah, but maybe just given some of these recent policy changes, does that impact how you think about the long-term opportunity in China, and maybe just remind us what you expect for long-term growth in that region?
Yeah. China, as I said a minute ago, it's complex, and we have a great team on the ground there, and our view is that the opportunities at this point definitely outweigh any risks there, given the fact that our immunoassay business is less than a lot of what our competitors have there. We actually see that as an opportunity. We believe that we can grow our immunoassay business there, and that is definitely a great opportunity for us going forward and to enhance the growth rate there.
Yeah. Okay. Maybe moving to margins. You've talked about driving adjusted EBITDA margin into the mid- to high-20% range by mid-2027. And that's versus the 22% that you're targeting this year. What gives you confidence in that goal? And maybe what kind of top-line growth will be needed in order to achieve that?
Yeah. There's been a lot of focus on this area within the business. It's definitely a prioritized area for us, and that is getting the margins back to where they should be. Our business was very negatively impacted by the higher-than-normal inflation that the global economy saw in 2022 and 2023, and at that time, we were much more focused on integrating the two companies and not dropping the ball with customers that we delayed going after taking those costs out of the business. Last year, we really started the efforts to pull those costs out of the business, and it started with a fairly significant staffing reduction of about 9% of our workforce, which generated a $100 million annualized savings, which is now in the numbers. We saw that hit the second half of last year and the first half of this year.
We also embarked on an indirect procurement initiative, which is going to generate $30 million-$50 million of savings, primarily in the second half of this year, primarily in OpEx. And we've made good progress there. And we fully expect that that's going to be realized. And that's a big part of, with the staffing, how we go from 19.5% EBITDA in 2024 to 22% EBITDA in 2025 for the full year. Now, as you move into 2026, we've already said that we expect the margins to, again, expand about 100 to 200 basis points, primarily driven by direct procurement initiatives, which are already in flight, in progress. And again, we'll see those benefits start to hit the P&L next year to grow our margins even further.
And then as you move into 2027, we have the announced closure of that manufacturing facility in New Jersey, which will generate close to another point of margin improvement in 2027. And then the further margin enhancement areas are going to be the accretive impact of shutting down the donor screening business and the accretive impacts of the LEX business, the molecular business getting up to scale. Both of those are, I would look at as more 2027 initiatives. So that's the roadmap for how we go from 19.5% EBITDA margin last year into that mid- to high-20s range that we've talked about.
Yep. Okay. Great. Maybe on capital allocation, how does your recent debt refinancing kind of help you achieve some of the leverage targets that you've set out to hit? And then maybe how should we think about financial flexibility going forward?
Yeah. We were pleased to be able to get that debt refinancing done when we did. It offers a lot of benefits to the business. The maturities are more staggered out now. We've got a Term Loan A with a five-year maturity. We've got a Term Loan B facility with a seven-year maturity. The financial covenants, particularly the leverage ratio, are much more friendlier for the business and give us a lot more room to maneuver. The required debt amortization payments are much less with the term loan B structure that we have in place. And the downside being the interest rates are a little bit higher than what we had in the previous stack of debt. But with the term loan B, it's inherent in that structure that I can go out and reprice that term loan B six months after we close the deal.
So sometime in mid-2026, assuming rates do start to come down in the economy and assuming we continue to execute, I do plan to go out and reprice that term loan B and hopefully bring the rates down even further. So we're pretty happy about where that refinance ended up.
Any change to timeline on kind of when you get to that 2.5-3 times target that you've laid out?
Yeah. Our leverage ratio is where we expect it to be right now. There's no surprises for us. But we don't like where it is. We don't like it above four. We were a touch above four at the end of Q2. For end of year this year, we do think that we can get it into a three and a half to four range, probably the high end of that range. And as you move through 2026 with the increases in EBITDA that we expect with the margin improvement, we do expect to get back into that targeted range of two and a half to three and a half. So I would say the leverage ratio targets of two and a half to three and a half are largely in line with the margin improvement target timeline as you move through the end of 2026 into early 2027.
Yeah. Maybe as we get on the other side of the LEX deal, how should we think about the portfolio? Are there other areas where you would look to acquire or potentially divest?
Yeah. We're pretty happy with where the product portfolio is right now. The combination of Quidel and Ortho deal thesis was to create a company that can serve the whole continuum of healthcare from home testing all the way through to reference lab testing. And that's still intact. So we're happy with the product portfolio and where it is right now. There is no need for any significant M&A for this company to hit our goals for revenue growth as well as margin improvement. And all areas of potential menu gaps that we may have in various portfolio or business units can be solved through distribution agreements or license agreements or really small tuck-ins. So no need for any big changes in the product portfolio.
Maybe from an internal R&D standpoint, what kind of steps have you taken around improving R&D productivity and any incremental changes that you have planned over the coming year?
I think the biggest change there is really the new culture that Brian Blaser has brought in. And that is a culture of focus and prioritization and productivity. And Brian has also his reputation in the space, having run Abbott Diagnostics for several years, has allowed us to really strengthen the team. And one of those new team members is a person by the name of Jonathan Siegrist. And he's running our technology and R&D. And he is really good at what he does. H e's bringing a culture of productivity and accountability into our R&D team. And so I do think that as Jonathan strengthens his team below him and we get a little further along into next year, you'll start to see the benefits of Brian's culture and the benefits of having Jonathan on board.
They're the big reason why we're going to be more productive in R&D.
Okay. We've got a few minutes left, maybe a couple questions to end it. As you think about the next kind of 12-18 months, what do you view as the two biggest opportunities for your business and maybe the two biggest challenges?
Yeah. The biggest opportunity by far is going to be LEX. LEX is a product that we're very excited about. And we do think with its competitive advantages and with our position in respiratory in the US that it is for sure our nearest growth and highest growth potential for this business over the next 12 to 18 months. So we're pretty excited about that. As far as what are the things that I worry about?
Challenges.
Challenges, I guess. Okay. I would say it's still the macro. The macro has been interesting to say the least over the last several quarters. I think that would be the biggest challenge for us. It's just continuing to execute on our margin improvement goals and our debt leverage reduction goals in this challenging macro.
As you think about your story, what's something that investors and/or analysts don't ask you about often, but you wish that they would?
I would say it's the fact that if you look at our base business and the business units within the company if you look at the labs business and the immunohematology business, which is about 75% of our revenue, it is a very stable and predictable business with five to seven-year contracts and growth rates that we've been hitting pretty consistently for many quarters now. So I know a lot of people like to focus on China. I get it. A lot of people like to focus on respiratory. I get it. But I do think there's a very, very solid base within this company that I wish people would spend a little more time thinking about.
Yeah. All right. Well, great. With that, I think we're out of time. But thanks, everyone, for joining. Joe, thanks for being here.
Thank you so much.