Good. Great. Thanks. Thank you everybody for coming. Welcome to the JPMorgan Healthcare Conference. I'm Casey Woodring from the Life Science Tools and Diagnostics team here. I'm pleased to be joined today by the QuidelOrtho management team, Doug Bryant, CEO, and Joe Busky, CFO. I'll turn it over to Doug quickly for the presentation portion, and then we'll have a Q&A session afterwards. Doug, take it away.
Thanks, Casey. Good morning, everybody. Again, Doug Bryant. I've been the CEO since 2009. With me here today, of course, as Casey said, Joe Busky, our CFO. Also here, Rob Bujarski our Chief Operating Officer, Brian Brockmeier, our VP of Investor Relations. If you don't not like the slides, it's his fault. Also joining us is a board member, Chris Smith, who was formerly the CEO at Ortho. If we have a tough question, Chris, you'll jump in and help us out. Do I advance to the? Yeah, here we go. We will be making forward-looking statements. Just as a reminder, we closed, the two companies merged together, at the end of May, so the financials we're gonna show are pro forma. Okay. Key messages.
QuidelOrtho is a meaningful player in each of the segments in which we compete. We're either one or two or three in the market, generally speaking, particularly in the segments where we that we consider to be addressable. The integration of the two companies is going very well, and I'll show a slide in a little bit on the details there. Both from a financial perspective, but also in terms of the opportunity that we see in front of us. T he more that we look at this, the more that we see there are opportunities to improve efficiency or effectiveness and for margin expansion. We're really super pleased so far.
Our products in each of the segments in which we compete are highly differentiated. I would say that, if you're a salesperson at QuidelOrtho, this is the time to be here. It's a very exciting time from our commercial organization. Really, I'd have to say, their ability to generate demand is creating a problem. It's a good problem, but a problem from an operational perspective as we try to scale up and catch up with the demand that we're creating globally. Financially, we're in great shape. With or without COVID, we're in great shape. But I would say that COVID clearly now has joined flu, strep, RSV as an endemic virus. It's not going away. I don't know what the latest.
I've got a note here 'cause I can't ever remember each mutation, but there's a new one circulating right now, and as I watch you all roam around the halls, I wonder if we're gonna run into that, what is it, XBB.1.5. Did I get it right? Something like that. That's the new one, apparently. We watch each of these rise in prevalence and then subside, followed by another one. I'm not saying that we're gonna be back where we were a couple years ago, certainly not, but I think it's gonna join flu, strep, and RSV as an endemic virus that we're gonna see. Then we'll talk about how we model that moving forward. Quidel Ortho now combined, again, since the end of May, is a broader-based global In vitro diagnostics competitor.
We have expansive global reach. We have a big portfolio of products that makes it far easier to have conversations, particularly in the segments that where we compete best in. Rob was our former general counsel, since he's not the general counsel anymore, I would say this creates an opportunity for us to bundle our products in larger accounts. The word bundle itself is not a problem. If you do it when you have excess market share, that becomes a problem, right, Rob? We're not there yet, it does create an opportunity for us. Ex-COVID, we had strong financial performance both in terms of revenue and margin in 2022.
Won't talk about the number of people in the organization because I don't think that's super important, but what I would say is having 2,800 sales and customer service people throughout the globe is certainly a new thing for us combined and I think is one of the key reasons that we were interested in putting the two companies together in advance of the launch of Savanna, which I'll talk about here in a second. We have a solid addressable market, again, we compete, particularly in the segments where we do well, we compete very strongly in that addressable market. We have a huge asset in the number of instruments that we have installed across the globe, that makes it easier to make decisions with respect to how we choose to make.
I was just noticing the people that didn't have a mask on a couple of minutes ago now have one on. Sorry. That's not in the script. We're financially solid. We're generating quite a bit of cash. Okay. We have a highly experienced management team. One might call us older, we certainly have a great deal of experience. The things that we're needing to do moving forward over the next several years, we've done most of it ourselves individually and as a combined group. We know what to do. The other thing I would point out, which is quite obvious, is the photos look better than we do in real life.
The other thing worth pointing out is the layer of management below this, at least a couple of layers, is also super strong and experienced. Okay, this is a busy slide, and I had notes here that would have taken the entire 20 minutes. I'll try to be succinct. This chart basically shows the continuum of diagnostic care and all the different entry points and where tests are generated. As you go left, we become decentralized and we go right, we're centralized. You could make an argument that some tests are naturally gonna go to the right because it's gonna be more efficient to put it in the out basket and have it sent to Quest or Labcorp.
Some of those tests would be your routine chemistry test, for example, or other panels that are part of your annual physical exam. I'm about to do my physical exam. I know I'm gonna draw my blood. I don't have an appointment for a month. And I know certainly that Quest or Labcorp, I think in my case it's Labcorp, will certainly get the results back within the month, right? Where it doesn't matter, timing doesn't matter so much, it makes sense. Or where things are really state of the art and new, for example, in oncology, it makes sense that it goes to a reference lab. For others, and we can easily argue the opposite. The other way, we see a lot of movement as well.
I think that the COVID experience certainly increased public awareness, and that public awareness causes us to seek care when we don't feel well. Those two factors, I think, are what I think will drive industry growth, not just for QuidelOrtho, but across the segment. We're gonna see increasing demand for diagnostic testing. Okay. I was told just to use the button. I could do that, but he asked me not to, Bryan. What's going on? Do what? Oh, I see that. Bryan, you've got some wet hands. Okay. We've been talking over the last couple quarters. It's from the water bottle. I'll my next career will be in comedy, apparently. There's hope. Over the last couple of quarters, we've used this slide a lot.
You probably, if you've seen presentations, you may have seen this or remember this slide. We use it internally a lot too. As we travel around the globe talking to employees, answering questions, we use this to talk about our five strategic priorities, which are integration and the evolution of our culture to become not only compliant, but also more effective. Im proving our execution, doing things well at speed, enabling people to make decisions that are appropriate at their level without fear. That's an important aspect of culture. Product innovation, we're gonna show a slide on that here shortly. Commercial excellence is also a very important factor for us and the reason why we put the two companies together.
Operational excellence, you know, Rob could talk to this all day long, but we're doing a lot of things, making a lot of investments to scale, and that's an important factor for us moving forward. Obviously how we spend our capital is a key factor too. Yeah. Okay. Our goal for integration is to create a company of purpose that enriches and saves lives with a culture that promotes employees first and prioritizes actions that support happy, inspired, and engaged team members. That's a lot. It's, it's not, though, it's not a slogan. It's not a headline. For us, this is our intent, and this is, for the executive team, it is our joint purpose. On the left-hand side are things that we've already gotten done.
On the right-hand side are things that we're moving forward with. There's just a couple of things I think worth pointing out here. Doing all this and merging the organizations and assigning people to various groups throughout the functions around the globe creates sometimes a little bit of dislocation. We still have 88% retention rate, which is quite good, and we wanna keep it there or higher. Then the other thing on the right-hand side says realize value creation technologies. We are investing significantly in systems that support processes that basically will help us become more effective and more efficient. There's a lot here on this slide, but we've got a lot going on.
I think the total number of R&D projects that we have is over 100 still, even though we've been reducing here and there. We're still well over 100 projects. During the one-on-ones today, if you happen to be with us, we'll be happy to go into detail on any one of these. Effectively, on the first column, you have the things that we're working on right now that are expected to be out in the next 12 to 18 months. In the middle, you've got 24 to 36 months. Is that it, Bryan? Then long term, those are the programs we're working on there. Okay. Savanna. We talked about Savanna just a second ago, but this is one of the key reasons that Chris and I first started talking about putting the two companies together.
We believe that Savanna is indeed a highly differentiated product. We've demonstrated in Europe and elsewhere that there is demand. We see pretty strong demand expressed by U.S., customers as well for this product, and we have a wait list. I think this is gonna go well. You could, you could argue that there are a lot of competitors out there in this space. You could argue that we just went through this period of time where a bunch of people already acquired instruments. I get all that, but this instrument's ability to push testing where the lab supervisors and the big integrated delivery networks want testing to be done, this allows them the flexibility to do it. Who knows?
All of us in my title, always talk about new product launches like they're automatic. They're not automatic. We need to show you. I've been doing this for about 40 years now, and I think this is a unique opportunity for us. I think this is a flagship product for us. If I'm wrong, you won't see me here next year. I'll be hiding. In terms of commercial excellence, we've just got so many different opportunities, just the size itself and the global footprint is meaningful. The cross-selling between the two companies is turning out to be a really nice opportunity for us. I list example markets, the U.S., Greater China, Germany and Italy in particular, we're already seeing results d istribution.
Quidel brings a lot in terms of distribution, particularly at the point of care, and we're gonna be able to leverage that in a number of places, particularly here in the United States. Then again, just the size, the 2,800 commercial teammates across the globe, is gonna be extremely helpful to the existing portfolio, but also to the new products that we intend to launch. Okay, Joe, he's gonna rate my answers here. Oh, can I go back one? There we go. There we go. On the very top here, you've got what we did in the third quarter. You've seen these numbers before. Those are our actuals. In the middle segment, what you've got is the combined company guidance. What we had suggested actually is as recent as the Analyst Day.
This is what we told you that we were aiming for. Then in the bottom, you see actually what we did. Okay? We can go into some detail on that, but we're doing better than we had suggested. I do think it's good to point out, though, and it's also good to look at your notes every once in a while, that we in Q4, ex-COVID, grew 18%. That's pretty good. Then for the year in total, ex-COVID, we grew 11%. I know we told you 7% and 9%, but. Then cost synergies. We wanna stick to the 90% that we said, but we feel very comfortable that that's achievable.
Not ready to tell you to change your models yet, but the things that we suggested that we would get done have been identified at minimum and in many cases already achieved. We're in really good shape in that regard. Here's how we're gonna deploy capital from what we think is the most important to the least important, at least at this moment in time, and things could change, of course. You could flip debt paydown and share repurchase depending on the situation. Right now, we think debt paydown is more important. Finally, here's the three-year outlook. We still think we're gonna do 6%-9%.
I do know that at Analyst Day, people did not like what we were talking about in terms of EBITDA margin, because remember, in the S4, we had said that we were gonna do 30% in terms of EBITDA as a percentage of revenue. We adjusted that downward to account for FX and inflation. We're assuming, or at least at that time, we were assuming 3%-5% inflation and to still be experiencing pretty significant FX headwinds. Of course, some of the FX headwinds have become less, if you will. I do recognize that a 3%-5% inflation rate over the medium term here is a bit conservative. I would call it more thoughtful, you know.
The impact from the 30% is you've got 150 basis points for inflation, and you got 50 basis points for FX. If you take those two combined, then you sort of hit the 28%. I'm reading the room here. 28% is kind of where we think we are if we assume inflation at that rate, if we don't account for the fact that FX is actually improving at the moment. Okay. I think that's it, other than I have a closing comment. Just to say, here were the priorities. Running 1 minute ahead of schedule. Here are the priorities, I don't wanna be flippant, but we're in good shape. We're in super good shape. I couldn't be more pleased with the progress.
I was worried when we first put the two companies together, like I should have been, all those things that we've put on paper and said that we were gonna do, we've done. I'll stop there, and we'll go to questions.
Perfect. Thanks, Doug. Great overview. For the Q&A session, we do have a mic runner in the room, so if you have a question, please raise your hand and he'll come over to you. If you're watching the webcast at home, please ask a question via the webcast question function. I guess, Doug, Joe, to start, wanted to touch on the pre-announcement for the fourth quarter. You mentioned 18% non-COVID growth. That's presumably due to flu and combo AB testing, correct? The upside there in the quarter, just given the strong respiratory season. Can you maybe walk towards if the ABC combo test in Sofia was the key driver there, or was it the legacy flu products, maybe in QuickVue Professional? Just can you give us a sense of what drove that?
It's about half and it's about 50/50 between those two, Sofia and our typical immunoassay products. 40%-45% generally would be flu standalone. 40%-45% generally would be combo. In other words, flu and COVID. The remaining 10% or so is RSV and strep. I think we did $350 in terms of flu for the quarter, which is strong. It's a little bit higher than normal.
You notably didn't call the labs business out when talking about the strong points for the fourth quarter in the press release. Curious as to what you're seeing there, just from a supply chain standpoint, and also from a customer demand perspective across the different geographies, particularly in China?
China is probably one of the drivers on the, on the club, on the lab side. We're doing fine. The growth rate in the lab segment is as predicted. It is true that we're trying to catch up in terms of instrument placements, and we have more orders right now than we can ship. We don't know that we'll get through it entirely in 2023, but we're moving in that direction. If we could get down some level lower, way under 600 on back order, that would be terrific. If we could solve it, if we could get it to down maybe around 150 on back order, I think that gives us another two points in terms of growth rate.
What sort of visibility do you have on working that sort of 600 instrument backlog down, on the supply chain plan?
Well, we're definitely watching it. We have plans in place with our primary third-party provider. The real issue, as Rob could tell you in some detail, is around chip availability. We do see that abating somewhat. We're hearing a lot about chips becoming more available as other products, consumer products in particular, that do require those chips, the demand apparently for those products is not as great as it has been. Whether that makes it into the healthcare segment, I don't know. We're in the same boat, by the way, as everybody else. Our ability to solve this probably is no worse or greater than anybody else's at this stage.
Got it.
Is that fair, Rob?
Yes.
Maybe the last question just on the pre-announcement. Curious as to how much revenue Savanna contributed on the molecular line in Europe, given the strong respiratory season? Just can you maybe walk towards more broadly the traction you've seen in Europe for this sort of early launch there?
It's still early, and remember that we've only got one product in the market in Europe, and that's the respiratory viral panel . It's super early. We do have a handful of customers, and we still have orders that we have not shipped. In terms of the actual dollar amount in the quarter, I'd.
I would just say.
I don't know the answer.
I would say the molecular business unit had strong growth from the quarter, ex- COVID. So it's good. Yeah.
Yeah.
We can get more into the actual numbers when we do the Q4 call.
Okay. That's fair.
Okay. I'll pause here, see if anybody has any questions from the audience. Looks like.
Hi, thanks. Just wondering on the legacy kind of QuickVue respiratory products, are you seeing a bit of a resurgence in that product line?
As we think about it now, is there an opportunity to convert those to Sofia customers or how do you view that product line? Because pre-COVID, it was kind of declining and converting over to Sofia.
Yes, a great question because I've been forecasting the demise of that particular product line for a long time. Those customers that use QuickVue, and some of them are quite large, and they have reasons why they use it the way they do. They're really hard to convert to anybody, which is good, including ourselves. It is true that we did see movement away from QuickVue and onto Sofia, the benefits of Virena as a selling point for those customers. At the end of the day, you know, COVID created a situation where everybody was very happy to use the QuickVue product. Of course, that QuickVue product is what's in the retail segment, which has also been a growth area for us.
I would love to see more of it converted over time because I think it's more differentiated, particularly relative to competitors outside the U.S.
Looks like we have another one from the audience.
Question on Savanna. Thinking about Savanna and its sort of long-term potential molecular platform for the company, not being very scientific, just gut feel, how would you stack rank your long-term application test menu for Savanna by revenue potential globally? You know, the top half a dozen or so. You know, you can think 10 years forward, where is the most revenue potential from highest down?
Well, right now, in the near term, it's probably related to respiratory illness. We do see, over time, that the sexually transmitted infection category should be also a really nice growth driver for us as well. When you look in the out years, you see that category increasing pretty dramatically.
Any others?
Yeah. I think, the GI panel is pretty interesting. Solves a lot of issues, particularly if you can break it into things that you're likely to see here in the U.S., versus if you travel into the tropics somewhere and you create two different. We call it a traveler's panel. I also like the vaginitis panel in this. I like that category. You see quite a bit of revenue in the out years there too. There are some other things that are just gonna be gatekeepers for us. You know, meningitis is one. Low volume, but we have to have it. The HSV VZV panel, which we're gonna include syphilis in now and potentially monkeypox as well. It's interesting.
That may be something that drives a customer to make a decision because you have a more complete menu, but I wouldn't see that being super high volume. Is that what you had in mind? Okay.
Yeah. Doug, maybe shifting to the long-term guidance. You mentioned the 28% normalized EBITDA margin in your presentation. Is that like the starting point for 2023, you would say? Then just what are some of the puts and takes to drive that higher by 2025?
Well, Joe's gonna tell me to wait for the earnings call, to provide guidance for the year. Directionally.
Yeah. I mean, that's what we've said. The last two earnings calls, we've said what Doug said in that the inflation. Well, let me take a step back. I know everyone likes to anchor back to the S-4 numbers, which I would do too, if I were in your shoes. It's, it's a, it's a data point out there. Those S-4 projections were done a year and a half ago. We've had a lot of changes since then, namely inflation and FX. You know, the business is no different. You know, the business is operating just as we expected it to be operating a year and a half ago. The difference between that 30% and what Doug mentioned, the 28%, is sort of a jumping off point, is driven by inflation and FX.
The two drivers, I think, that'll move it up further into the range, up into the 29%, even above the 29%, are the pace and the slope of the Savanna ramp and the pace of the synergies, the cost synergies. Those are the probably the two biggest drivers that'll potentially move us up into the higher end of the range or even above the range.
Got it. That's helpful. Maybe just within that 6%-9% long-term growth guide, what's embedded for growth in each of your business units between labs, POC, et cetera?
The labs business, we're pegging 5%-9%, I think.
5%-6%.
5%-6%.
Yeah. yeah, mid-single digit plus.
Well, I gave him the CEO answer. I get to do that.
You do.
Yeah. Okay. A conservatively 5%-6%.
Yeah.
Yeah. Unless we're able to solve the instrument backward issues sooner than we thought, right? On TM, the transfusion medicine business, recognizing we've had some pretty good growth this last year, moving forward, we would see that in the 2%-4% range. The remainder, of course, is just the growth in point of care.
It's the point of care, high-single digit, double digit.
You know, molecular, we've talked about the, what we're trying to do there with Savanna.
Yeah.
That's going to drive a lot of growth, obviously, even though that business unit's fairly small now.
Okay, that's helpful. Then, you know, notably not included in the long-term guide is just any kind of government contracts for COVID, how have those conversations progressed? How should we think about the pacing of potential government orders in 2023? Just any sort of color there.
Okay, sure. You saw the announcement on the one that we began.
In the Q4 . The thing I need to point out is, even though it's a number that exceeds $100 million in terms of the award, the guarantee is $54 million. Okay? It's a smaller number then, from a guarantee perspective. The recent order that you might have seen, I think it was announced on Friday?
Yeah, it hit the public website on Friday.
I can now talk about that. We were precluded by them of mentioning it until they announced it. As soon as we signed the document, they immediately announced it, which gave us no time for any conversation anywhere. In that order, I think it's $97 million is what they've requested. There is a schedule of X number per week that we have to hit. They're gonna allow us to use shorter-dated product, which is helpful, and, but there's no guarantee. That's everything I know, Casey.
Got it. Do you expect COVID testing volumes to be dilutive to margins in 2023, given some of the government contract pricing?
No. The reason is because the government contract pricing is at the margin level that's right at our corporate margin. All right? It's not dilutive.
Gotcha. We'll pause here. If anybody in the audience has any other questions? Nope. Okay, we can keep going. wanted to talk about QuickVue test capacity. The Carlsbad facility has 600 million annual test capacity for QuickVue. Just wondering, if you need to keep a certain percentage of that online for potential further government orders. You know, how are you thinking about potential excess capacity, and if there's any kind of ability to shift some of your kinda current, you know, other products to Carlsbad? How should we think about that?
We do have a couple things that are in the works to use that facility. To come back a little bit and say, when we were doing 16 million tests a week, we had 400 employees in the building making product. We're now down to 135. Our costs in the building are actually pretty reasonable and comparable to what we do in the other San Diego facility, which we call McAllen. It's right in line with our normal cost profile. Having said all that, yes, we are working on a couple different projects to use that capacity, and, you know, stay tuned. As soon as we solidify some of those things, we'll let you know.
Just shifting back to point-of-care, wondering how the cardiac assays fit into the high single-digit, double-digit growth rate, you know, TriageTrue, how that's kind of trending, and, yeah, anything on cardiac there?
It's early days. A big market for us is China. As we get past their current situation, and it's more normalized, we would expect to see growth rates in that high single-digit level.
Got it. Maybe just, you know, shifting over to Sofia menu and expansion priorities during the Analyst Day. You noted GI within the next one and a half to two years.
Thinking about other kind of areas to potentially expand menu on Sofia, just given the installed base's growth over the last two years, are there any sort of R&D projects there, that you'd call out as potentially, you know, adding menu?
Yeah. I won't name them at this stage, but I would tell you, Casey, that the number of projects is around 20 on Sofia.
Is Lyme included in that?
That's a good one. History of Lyme. We developed an antibody test. The test works appropriately. It does what it's supposed to be, but antibody testing for Lyme is not the ideal solution, right? We've been working on a tier two Lyme test, which was more of a confirmatory almost, as if we were replacing western blot. We do have a couple things that we're looking at, but it's not a big project for us.
Okay. Just had one come over email. Can you confirm the flu number for 4Q? I think you said $350 million. Is that the full year flu number you're expecting?
That's the midpoint of the range, yeah, that we provided.
For the full year.
Yeah. For the full year.
Got it. Thank you. That's helpful. Maybe shifting over to the labs business. At the Analyst Day, it was talked about that you know, the legacy Ortho business has been under-penetrated in immunoassay. You know, as the focus shifts more towards growing in that particular business, what gives you confidence that the perceived runway for future growth there, is real?
Because of our success in the U.S., market in particular, placing what we call integrated platforms that include both clinical chemistry and immunoassay. Just since I've been around for such a long time, let me give you a little history about how this market evolved over time. Companies like Beckman, well, even Ektachem, the Kodak Ektachem, they were principally instrument companies. In fact, Beckman used to be called Beckman Instruments. They made clinical chemistry instruments, and then they saw the need to move into other segments. Customers weren't really ready to do that at that time. These days, there is more of a propensity of laboratory supervisors to want to make a choice that includes both clinical chemistry and immunoassay. That is something that has happened.
I'll just give you the reverse. When I was at Abbott, as an example, we were strongly in immunoassay, did a nice job. We were dominant, actually. Can't say that. Sorry. We thought we needed to be in clinical chemistry, but we really couldn't do it that easily at that time. They had the reverse issue, right? Over time, though, what's happened is the customer base is more likely to look at both simultaneously.
Got it. Joe, maybe one for you on CapEx next year. At the analyst day, you spoke about near-term free cash flow conversion being around 50%-65%, just in the beginning of the long-term guide due to capital investment. What sort of capacity expansion projects do you need to do in here in 2023? Just, yeah, elaborate on that.
We did say that the cash conversion ratio off of adjusted EBITDA in the 60%-65% range. However, near term, we're thinking more 50%, and that is primarily due to an elevated CapEx spend. I'll call it in the range of $130 million-$160 million as you think about 2023 for CapEx. We do have some very important capacity projects in there. You know, most notably, obviously, there's Savanna. And on the lab side with slides manufacturing as well as instruments, instrument refurbs. There's a lot of good capacity in there. I'd say it's primarily focused on labs and molecular lines at this point, near term.
Just on the cost synergies, you mentioned that you've identified $50 million for 2023 versus the $30 million target. What's it take to realize that in this year? What do you need to do to hit that 50% number or $50 million number? You had reiterated the $90 million number through 2025. Just curious as to how much upside there is there potentially, and where that would be.
Again, the $50 million is, as Doug said earlier, that's an identified synergy number. We do have to execute on those. Some of those we obviously have. A lot of those were, you know, sort of low-hanging fruit with two CEOs, two CFOs, two boards. You know, obviously a lot of those have been executed. There is still a decent amount that we need to execute within that $50 million as we get through the early part of this year. The internal target for the synergies is obviously higher than the $90 million. We're driving towards that. The team is pushing. As Doug said, we're not ready to commit to anything above the $90 million. Let's get a little further down the path on executing this first $50 million. We can talk more about that.
Great. Well, looks like we're bumping up against time. Thank you very much, everybody, for joining us. Thanks, Doug and Joe.
Thank you.
For presenting.
Thanks, Chris.
Yeah.