Great. Thanks, everyone, for joining us this morning. I'm Vijay Kumar, the Life Science Diagnostics Med Device Analyst at Evercore. A pleasure to have with us quite a lot of. We have with us Joe Busky, the CFO, and we have Juliet Cunningham from Investor Relations. Joe, thank you for the time this morning.
Thanks, Vijay. Thanks for having us. Great to be here.
Fantastic. You know, Joe, I followed you guys back when you guys IPO'd. You know, I feel like there was a story there, right? There was some pipeline, there was innovation. You know, we had this sort of niche placement market opportunity where you guys were in that sweet spot of mid part of the market, not the super high- end. I feel like since the deal, there's been some pluses, some minuses, a lot of moving parts. When you look at the year- end review, right, I think you guys have done about 1% organic ex-COVID, and industry is doing mid-singles. How would you characterize the performance, right, relative to your expectations heading into fiscal 2025? You know, what played in, you know, came in according to your plans versus what changed?
Yeah. First of all, I would say that we had a very solid Q3 with top line growth right where we expected to be, very strong margins. We are tracking right towards the full year targets that we set out at the beginning of the year. That is the mid-single digit growth in the base business and the adjusted EBITDA margin going from 19.5% last year up to 22% this year. You know, we've had a lot of good success with the margin improvement initiatives. You know, we have seen about $140 million of cost outs since, I would say, mid 2024, you know, right around the time when Brian Blaser came in. That is really the impetus for the margin improvements that we're seeing. We're seeing, again, we're seeing the base business continue to chug along.
You know, admittedly, to your point, there's definitely been some noise. I would say that's mostly been in the cash flow area. You know, we spent a lot of cash in what I would define as one-time cash in the areas of severance to take out staffing, which again, we're mostly through that phase. Also, in the area of the ERP conversions, which we've gone live now with the ERP conversions. Those ERP conversions were really focused around bringing the legacy Quidel business onto SAP, which is what the legacy Ortho business has been on. Those are behind us now. I'd expect the one-time cash outflows really to start to dissipate in Q4 and for sure as we move into 2026 and beyond.
Gotcha. You know, when you say base business is mid-singles, right, I think we're excluding donor screening. Can you just remind us what is base and what happened with donor screening this year?
Yeah, it's a great question. I'm glad you asked it because there certainly is some top line headwinds. There's two areas that have been affecting our overall top line reported growth. That is, one is the shutdown of the U.S. donor screening business. As a reminder, we decided to shut that business down last year because it's a smaller market, it's lower margin, and it is low growth. It's just really not an area we're trying to allocate our scarce resources. It's not an area we thought we should be spending a lot of money given those dynamics of the business. We did decide to shut it down. It is going to be about a 2-3 point headwind on the total reported revenue for the year.
Now, as we move into next year, we'll still have some donor screening revenue in the first half of the year, but it's minimal as we wind down all those customer contracts. I think the next year the headwind on the top line will be about a point of, again, total company revenue headwind. The other area is COVID. COVID revenue, as everybody knows, has been declining. This year we'll see again, probably somewhere in the range of 2-3 points of top line headwind as that COVID revenue continues to come down to an endemic level. You know, if you take those two impacts out, obviously we are, you know, we've been growing 4% or 5%, which is the base business comprised of the labs business, which is solid mid-single digit growth and has been since, like you said, we went IPO at Ortho.
The Immunohematology business, which is a solid 3-4% growth business. The TRIAGE business, which is a high single digit growth business. You know, these are the businesses that are contributing to that mid-single digit growth profile. The good news is, again, I think we're almost through the Donor Screening headwind. By the time we get through the first couple quarters of next year, that headwind will be gone. We do think that with the COVID revenue, now that all of the government orders are out of the revenue and the retail business is not in the revenue anymore, what we're left with is a professional use space revenue, which is the revenue where we sell into the doctor's offices and clinics and urgent care centers. We know that business pretty well.
We think that the COVID only test when flu is not prevalent is being used by the doctors. We still believe it's going to be used by the doctors going forward. We think that where we end up this year, midpoint being around $80 million for the full year, is very likely the endemic level of COVID revenue. We do not expect any more significant declines or headwinds on the top line from drops in COVID revenue. We think we've digested all of those declines now over the last three years.
That's super helpful, Joe. Another thing, you know, that caught my attention was, you know, clearly three Q mid-singles organic, you know, that came in pretty strong. I think I was surprised by your China numbers. You know, some of your peers have spoken of VBP DRG. And I, you know, correct me if I'm wrong. I asked you this question last year and you said, look, we don't expect this to be an issue. Why hasn't China VBP DRG been an issue for you guys? Could that be an issue in 2026?
Yeah, China is a good business for us. It's about 11% of our revenues and the margins are strong. We will see, right, for year to date, we're about 2.5% growth in China year to date Q3. We do expect to have a strong Q4. We believe that we will be in the mid-single digit range for growth for the full year for China, as we stated on the Q3 call. We expect 2026 will likely be in that same mid-single digit range. We have largely been outside of a lot of the VBP and DRG and reimbursement impacts, mainly because of the nature of our business. I would point to three areas. One, we use a dry slide technology, which is different from most of our competitors who use a wet chemistry technology.
The dry slide technology has been outside of the VBP initiatives thus far in China. I would also say as a second thing that most of our businesses in stat labs and a lot of the stat labs, urgent care center, emergency room facilities in China, again, have been outside a lot of the DRG and reimbursement issues. The third thing is the nature of our business that has helped us is the fact that most of our business is routine chemistry as opposed to immunoassay. For our competitors, it's flipped. You know, most of our competitors' business is in the immunoassay space. A lot of the government programs have been focused on bringing down costs in the immunoassay area of healthcare.
You know, we are still actively trying to move to the immunoassay business, move more, you know, improve our mix of immunoassay business. In the short term, it's helped us because a lot of the programs have been focused on immunoassay and our business is more heavily focused on routine chemistry.
That's helpful. In another sort of big picture topic is in pricing. What has pricing been for you guys and how should we think of pricing for 2026?
Yeah, so pricing, and I'll break it down into the various businesses. I would say, first of all, in the legacy Quidel business, which is a lot of respiratory and the TRIAGE business and the point of care business unit, that pricing is pretty stable. Not a lot of movement one way or the other. On the legacy Ortho business, you know, so this is primarily the Labs business unit and the Immunohematology business. Since the majority of that business is focused on 5 to 7-year contracts with customers, it's a very stable business because of these long-term contracts. When these long-term contracts come up for renewal, we do tend to see about a point to a point and a half of pricing pressure. This is nothing new. We've been seeing this for decades and it's not unique to us either.
Our competitors see the same dynamic as these long-term contracts come up for renewal in the labs and the IH space. I would continue to expect to see, again, about a point to point and a half price erosion in that lab IH space and then fairly stable pricing in the rest of the business. That one to one and a half price pressure that we see each year, we offset with productivity in our plants. You know, those are just normal continuous improvement programs that we have in place that we know we have to implement to offset that price erosion each year.
Fantastic. I think the other sort of changes that came up this year was the M&A and discontinuation of SAVANNA. I know molecular has been in focus for you guys, right? You know, that decision to discontinue SAVANNA, if you just talk about what drove the decision, are there any revenue margin impact from the discontinuation?
First of all, I would say that the molecular business is a very important business for us. We want to be in the molecular space. You know, you heard me talk about that when I was CFO at Ortho. We talked about getting into the molecular space and Quidel has been talking the same, you know, of growing the molecular business that Quidel has had for years. SAVANNA is a great product. We are still selling that product. You know, we'll probably do $6 million-$10 million of revenue this year in the SAVANNA business. Not large, but you know, we have a customer base. We're going to continue to serve that customer base until the end of 2026 and into early 2027. The hope is to transition those SAVANNA customers over to LEX, you know, over the next several quarters.
The reason we pivoted to LEX, again, it's not that SAVANNA is a bad product. It is a great product. It really is. When we look at, again, the allocation of scarce resources and how we allocate funds for development of new products, it was determined that we could bring LEX to market faster for less money and enter a faster growing market more so than with SAVANNA. SAVANNA is more of a more complex, multiplex product. It will just take longer and more time and money to get the menu filled out. We believe that we can get the LEX menu completed faster and for less money. It comes down to really an NPV thing. The LEX product, we still believe we will get FDA clearance late this year.
I know late this year is, we got about three weeks left, but late this year, early next year, we believe we're going to get that FDA approval. We'll have a sort of a limited launch in the first half of the year during the respiratory season. We'll have a more robust launch in the second half of the year in Q3 and Q4. The product, we just love the product, the LEX product. You know, we believe it's got competitive advantages versus what's out there now in terms of turnaround time. You know, we can get a result in six to 10 minutes. The turnaround time, you know, based on our customer research and our KOLs, is probably the most important factor for success when you think about selling into urgent care centers, physicians' offices, emergency departments. Turnaround time is super important.
We believe that that turnaround time advantage is going to be important to help sell. We also have ease of use advantages versus what's out there now. The product is very simple to use, sample in, sample out with very little prep time. Again, relative to what's out there now, we believe that there is a nice competitive advantage there. We believe that the cost of the LEX product is less than some of our competitors out there. We believe that that will also be a competitive advantage for us as well. You know, based on those three reasons, we think that the LEX product is going to sell well.
Gotcha. I do not know if this is the right question for you, Joe, but LEX is this, am I correct in assuming this is not a multiplex? This is more going for the single plex kind of assays?
The first product that we'll have approved is three- plex. It'll be Flu A, B, and COVID. I would define more as the fast follower, fast follow menu enhancement will be RSV and strep. You know, whether we increase the plex up from three to four or have that be a separate panel, that's, I think that's a TBD. We believe those are the two next items that we would bring to market as menu expansion. The follow on for that, probably out more, you know, closer to 18 to 24 months would be, you know, more women's health menu on the LEX product.
Gotcha. Is this, I guess when you mentioned competition, is this more like Cepheid? Is that the main competitor in this market?
Yeah, for sure. They are definitely, they are definitely a strong competitor in this market, for sure.
Gotcha. You did not mention the turnaround time and cost, but maybe on the cost side, like how does your COGS and LEX compare versus what is out there in the market?
I don't know that I want to give specifics there, but I can tell you there are, you know, there are significant advantages there. Not that we're going to underprice the market. It's just that we can price competitively and still realize a strong margin in our financials.
Gotcha. On the SAVANNA discontinuation, are there any margin implications?
I don't think so. You know, we took a charge for a write-off of inventory in Q2 and Q3. I think we've largely been through most of those one-time charges to discontinue the product. You know, we'll just continue to service those customers through the end of 2026 into early 2027. I don't think there's any more significant impacts there.
Gotcha. Maybe sticking on to the sub-portfolio optimization kind of theme, any further optimization or pruning, if you will, that we should be thinking about? There has been a lot that has gone on for you guys the last 18 months.
Yeah, I think portfolio optimization is something you always do. It's just part, I think part of a, and Brian and I both believe it's part of a continuous improvement culture. You're always looking at your portfolio and trying to figure out what you can do better and how you can do better to not only serve our customers, but also our stakeholders. You know, there's nothing for me to announce today, but I, you know, we're always looking at that and tweaking, see what we can do there.
Gotcha. Since you brought up Brian, I mean, since he's come on board, what has been a major change, you know, from your perspective of the past 12, 18 months?
Yeah, Brian Blaser was a perfect fit as CEO of this company. Really, really enjoyed working with him. He's a great guy. He knows the space super well, having run Abbott Diagnostics for years and actually worked at Ortho back in the day. So his background is very unique, uniquely qualified for us and where we are right now. You know, you look at a lot of what he did at Abbott. We're doing a lot of the same things here. It's a lot about margin improvement and portfolio optimization. You know, we're super happy to have Brian on board. As far as what's changed, I would say, first of all, the talent we've brought in on the senior team has been upgraded. We've brought in some, you know, some really, some great talent, you know, particularly Jonathan Siegrist, who runs our R&D and technology function.
He's just been a great add. And he's been, his leadership is just invaluable. You know, I think, and there's a lot of other good examples, you know, within the leadership team. But the talent upgrade has been there. I think the other thing I would mention about Brian and what he's brought to the company is a greater focus on margins and just in all aspects of the business and how we improve margins and continuous improvement culture as it relates to margins. You know, a further focus or enhanced focus on things like ROIC, which I believe will serve this company well in the near midterm and long-term.
Gotcha. Sorry, one more on SAVANNA. On the margin, this SAVANNA as you ramp.
LEX.
LEX, thank you.
Sure.
Post FDA approval. Are there any margin implications you need to invest in this business?
Yeah, that's a good question too. I'm glad you asked it. It's important to note that the commercialization of LEX will not require significant resources for us to add. You know, we know the point of care business. We know the respiratory space. We have the team in place, the sales team. We have the relationships with distributors. There will not be any significant investment needed to commercialize LEX. As far as the development costs and the R&D costs of the menu, at a high level, I would say we're just basically replacing the SAVANNA cost we were spending developing SAVANNA with LEX. I don't expect any real, you know, positive or negative headwind, tailwind from pivoting to LEX. Again, I just want to reiterate that we do believe that we will commercialize LEX faster and for less money than SAVANNA.
For the near term, you know, it's essentially a replacement of what we were spending on SAVANNA.
Understood. That makes total sense.
Now, as far as margins, because I feel like your question's probably going there next. You know, LEX , with any new product, there likely will be some dilution of margins as you commercialize a product. You know, the slope of the ramp in commercialization will determine how much dilution there is versus when it flips to accretion. You know, we think that the revenue in 2026 will be somewhat limited because it'll be a limited rollout as we ramp up. It is more likely we'll have some dilutive impacts to the margins in 2025. As we continue to ramp the product in 2027, I would expect at some point, you know, it's going to start to flip to be accretive. You know, as I think everyone probably knows, molecular margins are stronger than antigen margins.
At some point, it will be accretive when we get that product up to scale. It is really just driven by the capacity of the plants and how much volume is running through those plants, obviously.
Gotcha. Maybe one more bigger picture question. Back when the transaction was done, Quidel and Ortho Clinical, one of the theses was cross-selling opportunity, right? Has it played out, you know, that thesis played out? Where are we on the cross-selling theme?
Yeah, just to put a finer point on it, I think it was the thesis coming out of the combination was that we would use the extensive Ortho global commercial team to sell legacy Quidel products. I would say it's worked out as well as it could because the two products that were most targeted for cross-selling opportunity were SAVANNA and TRIAGE. Now, SAVANNA, we just went through SAVANNA. You know, we're discontinuing that product. There hasn't been much there. There has been some, you know, of the, as I mentioned earlier, this roughly $6 million-$10 million of revenues we'll do in SAVANNA this year. A good chunk of that is outside the U.S. using the legacy Ortho sales team. TRIAGE is doing really well. TRIAGE was a product that was actually not growing tremendously under legacy Quidel ownership.
Now, again, with the Ortho sales team around the world, we're seeing really nice growth in China, Latin America, and Europe. That's really what's propelled the TRIAGE product to high single-digit growth rates this year. We expect that going forward as well. I think it has been a nice success there.
Fantastic. You know, I think you gave fiscal 2026 color on your third quarter call, right? Noted you're targeting mid-singles. Is that, sorry, that mid-singles, is that like a report or organic, or is that excluding the one to two points of still, I guess, the discontinuation of donor screening?
Yeah, that's the base business growth. You know, with the donor screening headwind of about a point next year, you know, so we'll be about a point off of that mid-single digit growth.
Gotcha.
Yeah. Also, just to reiterate it, we do think that the COVID revenue has probably flattened out. I do not expect a lot of headwind there. It is mostly going to be that remaining point or so of donor screening headwind as we fully wind that business down.
Gotcha. You know, from a segment perspective, because you guys do such a good job of breaking out labs versus hematology, how are you thinking about those different buckets?
Labs, again, which is about half of our business, half of our revenue, we still continue to believe it's going to be a mid-single digit growth business. You know, you may have seen the press release we put out a few weeks ago. We just got High Sensitivity Troponin approved for VITROS on the Labs business in the U.S. Although I don't think that's necessarily a needle mover in terms of growth, I do think it should give all of us more confidence that that mid-single digit growth will continue going forward. IH, immunohematology, again, very stable business. Again, there were 5 to 7- year contracts. We expect that business to continue to be in the 3%-4% growth rate in 2026 as well.
Gotcha. That's helpful. On, you know, the lab side, how would you characterize the competitive landscape on the lab side, right? I know you compete with fairly large competitors in that space. Has your share been stable on the lab side, or would you say like you're gaining or in a position to gain share?
Yeah, the lab space, it's very competitive. It's very stable. Given the nature of the 5 to 7 -year contracts, you don't typically see big market share movement over short periods of time. You know, our win rates continue to be consistent. We continue to have what we believe is good competitive advantages versus what's out there in terms of the dry slide technology, which offers lowest total cost of ownership, highest first pass yield, you know, highest uptime on our equipment, no water hookup needed, you know, so you can move the equipment around in the lab much more easily. You know, so there are a lot of competitive advantages we believe to our product. And so all that continues to be in place. You know, our sweet spot that we've talked about in the lab space continues to be that, you know, small to mid-size hospital and lab.
You know, I think we are, you know, likely, you know, picking up share there, although the total share I would gather is probably pretty steady. Our sweet spot is where I would believe we're doing pretty well.
Gotcha. I know back in the day the thesis was, you know, when you look at the industry, I think two-thirds of industry revenues were immunoassays, right? But for you guys, it was the inverse and two-thirds were clinical chem. And you want to switch that, you know, mix, right? Move closer towards the industry mix. Where are we relative to that transformation has, you know, immunochemistry, I guess, immuno?
Immuno assay.
Immunoassay, thank you. Immunoassay become a bigger portion?
Yeah, it's totally true that our revenue is inverted from where the market is in terms of the mix of immunoassay and routine chemistry. Similar to what I said about China earlier, it's the same concept. You know, so we're, you know, the market is two-thirds immunoassay, one-third routine, and we're flipped. And just to give you a sense of the pace of movement that we're seeing there with our business is that when we went public at Ortho, the integrated base was about 25% of the total installed base, the integrated analyzer base that runs both immunoassay and routine chemistry. That same statistic now is about 30% of our analyzers, our integrated analyzers that run both immunoassay and routine chemistry. That should give you a sense of the pace of the movement. We are definitely moving in the right direction, making progress there.
It's, you know, given the nature of the business, the long-term contracts, it will take time. I think the positive way of thinking about that is that we've got a lot of runway to go. We've got a lot of room for growth with our integrated install base and, you know, continue to run that strategy.
That's fantastic. I know as it makes changes, there is, you know, margin implication, immunoassays run at higher margins. How much of a margin uplift has been to the business given this mixed change?
Yeah, it's in the tune of 10 to 20 basis points a year. Now, unfortunately, I think that was masked by the inflation, higher than normal inflation we saw in the overall economy in 2022 and 2023 and in 2024. But it's about 10 to 20 basis points a year. And that's, you know, part of how we offset that one-to-one-and-a-half-point price erosion that I talked about earlier too. It's all part of that same equation.
Understood. I know back in the day, one of the key pipeline stories was, you know, translating the dry slide tech onto the immunoassay side. Where are we on that and anything that we should look forward from a pipeline standpoint?
Yeah, it's, you know, like every company in our space, you know, the analyzers, the platforms, you know, have a life, a life cycle. I would say our platform is still relatively young, you know, with the workhorse VITROS integrated analyzers coming out in 2018, 2019. However, you know, it is time for us to start, and we have started to think about what the next platform looks like. I would just say probably more to come on that. You know, it's a little too early in the game for me to talk too much about that. We're definitely in the mode of planning that next platform for the VITROS and the Labs business.
Gotcha. Gotcha. I know from an assay menu perspective, you mentioned troponin. I missed that, the High Sensitivity Troponin too. That is a significant milestone, right? Anything else from a menu standpoint we should be looking forward to?
You know, all of us and all of our competitors are constantly looking at the menu and upgrading the menu and coming out with new menu. It is sort of a never-ending game. You know, having been in the space for a long time, I have seen a lot of it. You just have to keep up with it. You know, that is why you spend 7%, 8%, 9% of your revenue in R&D to keep up with the menu. Again, as I said with High Sensitivity Troponin, I do not think there is any one menu item that is a needle mover, but they are all important to keep up with. You know, there certainly will be others that we are working on right now and we will come out with soon. There are others in the pipeline that we will announce when the time comes.
Understood. Maybe switching gears to immunohematology, you mentioned 3-4% kind of outlook for 2026 for that business. Is that what the market grows in immunohematology, 3-4%, and you guys are growing in line with the market? Could you sort of accelerate that to mid-singles?
You know, for immunohematology, we are the, as a reminder, we're the number one market leader. We're the market leader around the world in immunohematology. You know, we are growing with market. It's, you know, it's that 3%-4% is at market. Can we accelerate that growth rate? I think there are ways we can do that. I think that's probably linked to next-gen platforms, which again is similar to what I mentioned with the VITROS platform, you know, more to come on that.
Gotcha. And then on the point of care side, you know, ex-COVID, I feel like even ex-COVID point of care has declined year to date. Why is point of care declining when the industry is growing, I think mid-singles plus?
Yeah, there's some timing with the quarters, Vijay. You know, that it's down 50 basis points ex-COVID Q3 year to date. And that's driven by some timing within the non-TRIAGE cardiac business and also within the TRIAGE business, which we believe we're going to have a strong Q4. I think we're going to be fairly close to that range by the end of the year.
Gotcha.
Yeah.
When you look at 2026, what's the narrative for point of care?
Oh, I think the mid-single digit is, you know, at market, I think that's fair. Yeah.
Okay. Okay. How's, I guess, switching gears to, you know, margins, margins have been, you've set some pretty ambitious targets. And to your credit, you guys have delivered on fiscal 2025, right? Despite revenues, revenues optically being impacted by these divestitures or wind downs, if you will.
Yeah.
What's, you know, just remind us what's been the tariff impact, gross tariff impact, how have you offset that and any headwinds for 2026?
Yeah, the tariff impact, the latest we have mentioned there is that the 2025 impact is $20 million-$25 million of gross tariff impact. We have more than offset that because originally the tariff impact was higher than that. We had implemented, executed cost reductions in staffing area and other controllable cost areas to fully mitigate that tariff impact. As you move into 2026, it's still a little early, but I'm sure everyone's reading the news like I am that there's a potential deal between the U.S. and the U.K. to mitigate, eliminate that tariff between the U.K. and the U.S. As we've said several times on our earnings calls, the products coming from our immunoassay plant in the U.K. into the U.S. is our largest source of gross tariff impact.
If there is some reduction in that tariff, that's good news for us in 2026. Now, again, I think it's too early for us to say anything definitively, but it does seem like things are trending positively for 2026 in the area of gross tariffs.
Gotcha. I'm assuming nothing changes, Joe. What is the gross impact for '26 from a tariff standpoint?
Assuming nothing changes?
Yes, no changes. What's the gross?
I think we'd be just annualizing that $20 to $25, you know, so it started in April, you know, probably in the $25-$30 range.
Okay.
Yeah.
Okay. That's helpful. U.K., would you say the U.K. is maybe half or more than half of the gross?
Yeah, it's definitely the majority. Yeah, it's a large piece of the tariff impact. Yeah.
That's helpful. On a marginist this year, you guys have shown some pretty strong margin expansion, right? Obviously, you had the cost saves, $130 million plus of cost saves. How are you thinking about '26? Are there more cost saves coming in or what drives, I guess, the margin expansion in '26?
Yeah, so the $140 million of cost reductions that we just mentioned on the Q3 earnings call are primarily made up of staffing reductions and indirect procurement reductions or savings. As we move into 2026, we've already said that we believe we can grow the margin, the EBITDA margins another 100 to 200 basis points. That margin improvement is going to be largely made up of direct procurement initiatives being executed. Those direct procurement initiatives are taking us into 2026 and even into 2027 because they are just lengthier, more complex projects where you're doing more than just renegotiating prices with suppliers. You're bringing in new certified suppliers. In some cases, you're swapping out materials or swapping out subcomponents. These projects require more resources in the areas of quality and regulatory and R&D to make sure you get it right and not trigger an FDA submission.
We're taking our time with these projects. Most of the margin improvement we'll see in 2026 will be from these in-flight direct procurement projects.
Gotcha. Based on the comment, Joe, would it be fair to say even if revenues, if there were any surprise in the revenue front, we should still realize these margin expansions for next year given it's coming from direct procurement savings?
That's right. Yeah.
Okay. If the business does grow mid-singles rate, should we expect to see some operating leverage in the business?
I would say, Vijay, that the 100-200 basis point margin improvement that we've discussed for 2026 would include any of that top line leverage in the mid-single digit growth on the base business.
Gotcha. Longer term, I think you've laid out a mid to high 20s EBITDA margin. Is there a timeframe on what the longer term means? What is, I guess, how do you get there?
Yeah, the remaining pieces to get there are the completion of our Raritan, New Jersey facility consolidation, which is going to take us into mid- 2027. As I mentioned a minute ago, there's definitely going to be some direct procurement initiatives that will leak into 2027 as well. The donor screening business shutdown, which we've sized at 50 to 100 basis points of margin accretion, will likely leak into late 2026 into 2027. The final piece I would mention is the LEX business. I do believe, you know, given that molecular margins are stronger than rapid antigen margins, I do think that we're going to see some margin accretion there at some point in 2027 or even 2028, depending again on the slope of the ramp up of the business. Those are all the pieces that will get us squarely into that range.
I believe, we believe that, you know, we should be in that range as we move into the second half of 2027 because we'll be largely complete a lot of those projects that I just mentioned.
Gotcha. When we look at the mid-singles kind of top line for the base business with around 100 to 200 basis points of EBITDA margin expansion, what does that translate into EPS growth for next year?
Yeah, I think it's fair to assume that it'll be double-digit , you know, just based on the adjusted EBITDA improvement and the fact that, you know, the tax rate should be relatively consistent with this year. You know, we will see some higher interest expense next year for the full year, you know, because the refinancing we did on the debt stack was in August. We are seeing a higher interest rate just due to market increases in the fourth quarter of this year. That trend will continue through all of next year. That'll be a little bit of a headwind on EPS, but we should still be in the double-digit range.
Gotcha. I know this year you had a pretty wide EPS range.
Yeah.
That was narrowed down on 3Q.
Yeah.
Was that more of, I guess, just the optics and the high- end coming down, or what drove the high- end step down?
We started the year with, you know, back in February when we gave guidance originally for 2025, we started with some relatively wide ranges on revenue, adjusted EBITDA and EPS due to respiratory revenue range. The non-respiratory revenue is always a very, you know, fairly tight range for revenue. The respiratory range, we usually give a fairly wide range. That is what produces those wider ranges at the beginning of the year. Now, as we close Q3 into the earnings call, you know, with seven weeks left in the year, we have, again, continued good visibility on the non-respiratory business. Even the respiratory business itself, with only seven weeks to go, we started to get much better visibility. We thought prudent to narrow the ranges, maintain the same midpoint of the guidance. For revenue and for adjusted EBITDA, we did not change the midpoint.
It just narrowed. EPS did come down, but that was solely due to the interest expense, higher interest expense in Q4 from the debt refinance and also slightly from a slightly increased tax rate due to the tariff situation. There was no impact for anything operationally.
Gotcha.
On EPS. It was all driven by interest and taxes.
That's helpful. You know, since you brought up respiratory season, I noted where you see a bump in Q4 and in Q1. How's the current season playing out? Is it in line with expectations? Have you seen any spike in the respiratory season?
The data points we're seeing now are good in that we have the southern hemisphere flu season completed and behind us. It was a strong season that part of the world saw. We're also seeing some fairly strong flu variants in the U.K. We also know that vaccinated rates are down, which should help us. You know, in our discussions with our customers, seem to indicate this is going to be a fairly typical flu season. What we are seeing, though, however, just to make sure we hit this point before we run out of time, is that we are seeing the flu season get back to more pre-pandemic patterns where you see the peaks come more in Q1 than in Q4.
I do think that the flu revenue this year will be flatter to 2024 because of that, because we'll start to see, I think, more revenue move into Q1 than versus Q4. And that's all built into our guidance.
Gotcha.
That is all factored into the guidance we gave back in February. It has been reiterated all year. Our flu revenue guidance has not changed all year.
That's helpful. Maybe last question. One, I think one of the knocks has been the free cash conversion, which you brought up.
Yeah.
What should normalize free cash conversion be? When can you get there? If you fix free cash rate, like the thesis seems to be a mid-singles top line, robust margin expansion, double-digit EPS, feels like the stock is cheap. You know, is that valuation disconnect just, you know, tied to free cash, you know, normalizing?
Yeah, there, you know, with any stock, there's always a lot of put and takes, Vijay. I do think that the cash flow, free cash flow is probably one of the more concerning areas that people have about the stock. You know, admittedly, we've spent a lot of money, a lot of cash, one-time cash on these ERP conversions and staffing reductions in 2024 and 2025. Those one-time cash is really going to start to come down in Q4 and in 2026. We are going to start to pivot towards more GAAP cash flow reporting as opposed to adjusted free cash flow reporting. We will start to see our cash flow improve in 2026 and beyond. Our ultimate target is to get the 50% of adjusted EBITDA in terms of free cash flow conversion.
I believe we'll get there probably sometime in the second half of 2027, along with the margin improvement goals.
Gotcha. With that, we're out of time. Joe, thank you so much for the time this morning.
Thanks, Vijay.