Okay, we're going to kick it off. I'm Tycho Peterson from the life science team. It's my pleasure to introduce QuidelOrtho. Why don't we jump into it, Brian? Maybe just starting with a quick look back on some of the gives and takes on 1Q. A number of moving pieces there between flu, Middle East, China distributor stocking. Maybe just talk a little bit about where these stand and how we should think about momentum coming out of the quarter.
Yeah. Thanks, Tycho. It's good to be here with all of you this morning. Maybe just start with a bit of a reflection on the company a couple of years after joining. QuidelOrtho is really a vastly different company than it was when I joined the business two years ago. We have implemented significant streamlining of the organization. We've taken over 900 positions out of the business, implemented over $140 million of cost savings. We'll deliver another $30 million-$40 million this year. We have assembled, I think, just an amazing leadership team with significant changes across the board in HR, R&D, quality, regulatory, operations, commercial, and really have set the foundation for significant growth and profitability in the business. I think as we reflect back to Q1, specifically to your question, I was surprised by a couple of things in the quarter.
We had a really strong start to the respiratory season at the end of the year, and then just a complete drop-off. ILI visits were down 30%. That happens occasionally. As we've looked historically back over time, every time we've had a significantly lower Q1, generally speaking, the year more than fully recovers, and we've been pretty cautious with our guide. We're forecasting that our respiratory business will be down 8% for the year. I think the good thing is that there's nothing underpinning the structural nature of the respiratory business that I'm concerned about. We did extensive work with our KOLs to understand have testing patterns changed, have protocols changed, and all of that remains intact, so no concerns there. I think the other thing that was surprising was the pivot by the Chinese government toward a broad-based reimbursement change.
There were some rumbles about a volume-based procurement process that would affect dry chemistry strips. That suddenly pivoted. We got a little bit of a head fake there, it pivoted to this broader reimbursement change that really is eliminating differential pricing for differentiated technologies, which is going to affect our dry slide chemistry business. We're still waiting for the final rule here to be defined. Hopefully, that will come out at the end of June. Aside from those two factors, the underlying business is really performing quite well. Our labs and immunohematology businesses are very stable, solid mid-single-digit growth businesses with very long contracts, high win rates, high retention rates on existing business, we have a lot of visibility and predictability in those businesses, and they continue to perform well.
Maybe just hitting on China for a minute because you saw sales to distributors slow in March ahead of the expected pricing declines. I think you've incorporated a $30 million headwind for the year. Can you maybe just talk about how much you saw in the first quarter, what you're expecting in the second quarter, and then any signs of a pickup that could lead to a recovery in the back half of the year?
Yeah. It was in the range of $10 million-$ 15 million. I think we'll see some more of that in Q2, which is included in our guide. We do expect distributor sales to pick up toward the back half of the year as they continue to need to order and replenish inventory. I am expecting China to return to low growth in the second half of the year.
I think one of the other questions we got a lot coming out of the quarter was just on the Middle East. I think you said $5 million-$10 million, going from the first half to the second half as things normalize. What's the level of visibility on those orders, and is there any risk it could slip into 2027 if things persist?
No, I don't expect it to slip into 2027. We're already seeing signs that that should return in the second half of the year, and it was really relatively immaterial. It's less than $5 million worth of tenders and orders that were delayed. Some of them delayed just because of issues with shipping routes that were impacted at the time, and others were just uncertainty around tenders. We're already seeing signs that those will return in the second half of the year.
Maybe can you just touch on some of the other drivers for an acceleration in growth in the back half of the year? Obviously, there's an extra selling week in the fourth quarter. You've got new product launches, potential LEX contributions. Maybe just help us with the bridge to the back half of the year.
Yeah. Historically, the second half of the year is always our historical highest, and the first half is our historical lowest. The second quarter, in particular, is our lowest in terms of sales, adjusted EBITDA, and cash flow. We do expect that cash flow will be negative for the first half of the year. As we move into the second half, sales will accelerate just as a part of the historical ordering pattern. We have a couple of really good things going on that I think are solidifying our position for the back half of the year. We have the VITROS 450 and VITROS ECL launch outside the United States.
Basically, the 450 is a clinical chemistry analyzer combined with the ECL, which is an immunoassay analyzer, that are targeted for low-cost conscious markets, and in markets where we have historically not been able to play because we lacked the full menu to do so. That combined with our high-sensitivity troponin launch in the U.S., which is really taking off. We've got several hundred customers now that have converted over to high-sensitivity troponin. That's a game changer for us in the hospital market in the U.S. We haven't included a lot of impact this year for LEX, which we're now calling NULEXA. We expect to place a few hundred instruments in the back half of the year and then be able to roll into 2027 and position ourselves nicely for the 2027, 2028 respiratory season.
A lot of growth drivers in the business for the back half of the year, and looking forward to really charging into 2027 as well.
The other dynamic is there's a decent margin step-up implied as well to get to 23% for the year from 17%-18% in the first half. Maybe just can you unpack how much of that is fixed cost leverage with the improving top line versus product mix versus some of the cost outs? Maybe just give us a bridge there on some of the moving pieces.
Yeah. There's a couple of things there. First of all, we have our donor screening business is being unwound, so we get the advantage of that in the back half of the year. Again, as our sales expand in the back half of the year, we take advantage of the expanded EBITDA margins there. In addition, we are continuing to drive additional incremental cost savings in the business. We've got $30 million-$40 million of incremental cost savings associated with direct and indirect procurement projects that'll be implemented and taking effect this year. As well, we're going to be doing some additional targeted staffing reductions that will expand our margins. Think about for the full year, it'll be about 100 basis point improvement in margin year-over-year.
Now, I guess, are there additional levers that you flagged if the top line doesn't come back to get you to 23%?
Yeah. We always have levers and plan Bs that we can implement if we need to. At this point, I don't anticipate needing to have to bring those into play.
Maybe we can jump into the businesses then. Lab, in near term, you talked about VITROS 450. I guess, just maybe talk a little bit about how much of the recovery you're anticipating here as market pick up and areas outside of China. I think Latin America has been an area you've had a little more focus on lately.
If you look at Q1, our Q1 performance for labs, if you exclude the China impact and the impact of our Grifols settlement, which impacted the top line but is actually favorable for us on the bottom line, we grew about 1%. That was against a very difficult comp in 2025, where I think we grew about 7% in the quarter in 2025, which is a lot for a Q1 for us. Our underlying labs business continues to perform very well. I would say LATAM and countries outside of China in Asia Pacific, we continue to be very under-penetrated there, and those are good opportunities for us in EMEA, LATAM, and those Asia PAC countries, not including China.
We do have a focus on additional penetration there, as well as over-indexing on our immunoassay penetration with our integrated systems where, again, we're kind of under-penetrated relative to the rest of the industry. I think those factors, again, help this acceleration into the back half of the year.
I guess just thinking a little bit longer term, maybe we tend to think about the core lab market, mid-single digit, Steady Eddie growth. As you highlighted, you're over-indexing on immunoassay. You've got high-sensitivity troponin, Lifotronic. Could you be in a position to outgrow the underlying market here for the next couple of years?
I think the way I think of it is that these new products, the 450, ECLs, some of our new flexible automation and informatics solutions, a high sensitive troponin, these are things that really help us support the underlying mid-single digit growth of this business over the long term. I think what gets us excited about projecting into the mid to high single digits are new systems which we have initiated development of, and so I think those are a little further out, but I think solid mid-single digit in the near future with the opportunity to go higher as we think about new systems over the long run.
Could those be in the next three to five years? Is that the right timeframe?
That's the right timeframe to think of that.
Point of care, we touched on respiratory. I guess, talk a little bit about what you're expecting in 2Q specifically for respiratory, and then as we think about the rest of the year, any read-throughs you're seeing from early data, Southern Hemisphere?
Yeah. I think it's still a little bit early to look at the Southern Hemisphere data. I've seen some data that shows flu cases down, but I've also seen data that shows ILI visits tracking in line with 2025's numbers. That could just be timing at this point, because we're right at the start of when flu season happens in the Southern Hemisphere. I think we're just a little bit too early to draw any conclusions about what's going to happen the back half of this year. Historically, as I said, as we've looked back pre-pandemic, typically you do have a pretty good recovery in the back half of the year, where you've had a down season in Q1.
Just maybe thinking about the contours of demand for point-of-care ex-respiratory. Yeah, I think Triage last year was up high single digit. Is that doable again this year?
Yeah, Triage, we were impacted a little bit with Triage by the China situation. I would expect that to abate. The rest of the business of Triage is a great grower for us in the U.S., as well as EMEA and LATAM. That business is growing in the high single digits. I expect some recovery in China toward the back half of the year as things normalize there and continue to drive great growth with the Triage platform.
Thinking just longer term on point of care, now guiding down 8%. It's been down double digits in the last three years. I guess flu severity will always be a factor, but is there anything in your control you can do to get this segment back to longer term growth?
Our biggest asset for point of care is our large installed base of instruments, SOFIA, Triage, soon to be NULEXA. We're very focused on taking advantage of that installed base in terms of new content. We're looking at adding non-respiratory assays to SOFIA, like infectious mono, H. pylori, C. diff, norovirus. In addition, we're looking at high sensitive troponin application for Triage in the U.S. Some opportunities for us to look at sepsis, as well as a number of toxicology assays. LEX, I'm very excited about that platform. In addition to the flu A/B SARS combo, we're going to be doing a fast follow with strep A, followed by RSV. Those are all opportunities for us to elevate the growth profile of the respiratory business beyond just the respiratory season and the volatility there.
Maybe just double-clicking on LEX, now that the deal's complete, interesting piece of technology, obviously backfills your entry into molecular, after the SAVANNA R&D project was shelved. just talk a little bit about why this deal was so compelling for you guys and what it brings to the portfolio, and then how are you thinking about timeline for some of the menu build-out you just mentioned?
Yeah. The deal was compelling because it was an opportunity for us to make an investment and limit our risk at the same time, and get into a technology, at an attractive price, frankly. The assay was approved last year. At the time we were making our decision around SAVANNA, we had seen the clinical data and realized that the pivot toward LEX, I think was a better strategic alternative for the business. We went ahead and made that pivot. We've completed the acquisition of the business. At this point, we're looking at ramping that as quickly as we can. I'm excited about the demand for the product at this point.
We've gone from the thought of placing a couple hundred units this year to placing a few hundred units. Honestly, I could probably place a thousand, but I'm trying to modulate the cash flow impact of doing so. I think, my biggest concern is being more supply-constrained there than demand-constrained. We're doing a lot of things to ramp up our production in Cambridge and the U.K. for our assays as well as our instruments. With the idea being that we place a significant number of these instruments in 2027 in preparation for the 2027, 2028 respiratory season and are able to take advantage of that. I do see this over time as being a several hundred million dollar opportunity for the company, and generating molecular-like margins over time.
I think it will be dilutive probably through 2027. My view would be that it should be accretive to the profile of the business exiting 2028 for sure.
I guess just in terms of the initial expectations and potentially upside from a demand perspective, anything you can point to in terms of geography, customer size, profile?
The typical customer for this is a point-of-care instrument, and what's great about it is that in almost every case, you have a SAVANNA platform that has a molecular competitive instrument right next to it, and it's an opportunity for us to go in and sell a combined value proposition. The great thing about NULEXA is not only its speed and workflow, it's a completely sample in, answer out workflow, which compares to a lot of the competitive instruments that have a very cumbersome and long workflow. Up to 30 minutes in the case of some of our competitors, and many interventions that have to take place at certain time points in performing the assay. We don't have to do that. 6-10 minutes versus 20-30 minutes of total hands-on time. The economics for NULEXA are really compelling from a customer standpoint.
You can think of one of our competitors, probably they have to run two assays because they don't have a combo test. Think of that as costing in the $80-$100 for that customer with a reimbursement of $155, whereas we'll be in the, let's say, $40-$60 price range with $180 reimbursement with one test that's performed with much easier workflow and a faster result. We're really excited about the potential here and the opportunity for us to go in and utilize our existing SOFIA base to provide an overall solution for our customers.
How should we think about the potential step function and growth as you fully commercialize it more broadly in 2027? You've been in diagnostics a long time. Any good historical analogs that could help us contextualize what this?
I don't know. I took a look at some of the competitive placements. A lot of our competitors placed units and did a lot of their placement growth during COVID. There's been some recent competitors out there, but they're more geared toward the professional segment as opposed to point of care. I don't have a good analog to share with you, but needless to say, I think, again, we're going to be more concerned about having enough to supply and, again, balancing that with cash flow in the business to be able to support it over time.
You talked about above corporate margins at some point in 2027. Any ceiling you can point to on the margin profile after balancing higher margins with pricing and R&D?
Yeah. Just generally speaking, they will be above our average historical margin profile. Typically, molecular-level margins are in the 60%-70% gross margin range, is the way to think of it.
I guess you mentioned the menu build-out, just timelines for full menu and anticipated pull-through once you have the full menu.
Yeah. Actually, I'm not too concerned about the menu because really the workhorse assay is the Flu SARS combo test. That's the majority of the testing that happens during the respiratory season, and we're going to be able to provide a really compelling value proposition, as I just described, right out of the gate. Again, going back to the menu, we just got a hold of the business here in the last couple of months. We're working with a team to put together timelines for a Strep A assay, followed by an RSV assay as quickly as we practically can. We'll probably share some more visibility around that as we get further down the road with the business.
I want to maybe go back to China for a second. I know we talked on it a bit earlier. A couple of questions that we've gotten are just what's going to happen in the next 12-18 months with policies like VBP. You talked about that in January. You have a more recent NHSA policy. Maybe help us level set on the status of these two policies as you know them today and the expected timing of the impact.
As I described, the Chinese government has pivoted toward this broad-based reimbursement change, and it's going to impact roughly half of our business in China. It mainly impacts our dry slide chemistry tests in China, which is about half of our business. Based on the initial rule that came out, we're expecting probably at the end of the day, about a 30%-40% impact on our pricing in the market. Where they are in the implementation with that is they originally were going to implement it in April, then it got pushed out to May and now June. There's been a lot of lobbying by KOLs, hospital groups, industry groups to try to modify this policy because it wasn't greeted favorably, just put it that way.
At this point, we think that it's going to be rolled out or published sometime in the June timeframe. It's our understanding that they will pilot this process in three provinces, and there's going to be a process where they have to match literally 4,000-6,000 codes into several hundred codes. I think that's going to be a bit of a political process because everyone's going to be trying to get their codes matched to the highest reimbursed codes in the new set of codes. I think they're going to go through a bit of a process to do that. Our planning assumption is that they'll do the pilot in the back half of this year, in 2027, they'll roll out the rest of this to the other provinces.
Again, we're planning that they'd be fully rolled out by the middle of next year. If you look at some precedents for how this has been done historically, that might be accelerated because some of these things have taken years to implement. We're planning it's going to probably happen in that time period. That's good because it gives us some time to respond. Our China business has historically been staffed for a lot of growth. We're looking at how we're going to adjust our go-to-market model in China in response to this to offset some of the costs. We'll probably have to do some other things across the business, but we're already underway and looking at how we can fully offset the impact of this. I think that the way I'm looking at this is it's kind of a one-time reset of our China business.
Even after this change is made, our margins in China are accretive to the average margin profile for our business. It remains a good business. It's not going to be as high growth business as it used to be, and we'll have to approach it a little bit more cautiously. Again, I view it as a one-time reset at this point.
You sort of alluded to this, but how quickly could you reset your cost base there? Would that come with a big reprioritization strategically, of that region, mid to long term?
No, I think again, we're going to be looking at taking cost structure actions to offset this. We're already well down the road and working on that and moving swiftly there.
Another big topic for investors has been free cash flow, right? I think we should spend a minute on that. Number of moving pieces, getting better here, and it was in early 2025, and then you had a couple rough quarters, I guess. You had the ERP conversion that impacted it as well. Maybe just at a higher level, talk about the roadblocks going forward to the extent they're still there on free cash flow improvement.
Yeah. Free cash flow improvement is a central focus of the company. We have aligned our management teams, and in fact, our entire company bonus structure has an element of improving cash flow. All of our compensation is tied to making this a priority. I would say we've made some good progress here over the last couple of years. We have been cash flow negative for the last two years that I've been here, and I think the year before that, prior. This year, our guidance is that we will move to $100 million-$120 million of positive free cash flow for 2026. Typically what you saw in the first quarter were negative cash flow, will be negative cash flow again in Q2. That's our historic pattern.
As our sales and margin expand through the back half of the year, and as we start to put some of these ERP conversion costs, integration costs, the costs for the organizational rightsizing, et cetera, behind us, and we deliver on our incremental $30 million-$40 million of procurement savings, those will all kick in to propel us towards that cash flow goal. I would also say that we have a huge focus on every aspect of our cash conversion cycle. Inventory, accounts receivable, payables. We're looking at probably 15- 20 days of improvement in inventories this year, which will all help us achieve that $100 million-$120 million of cash flow by the end of this year.
You're still targeting, I think, over 50% conversion in the back half of 2027. I guess just to some of the initiatives you mentioned, how much of that comes from one-time benefits from site consolidation, procurement versus more sustainable items like lowering CapEx and reducing working capital drag like the days reduction you mentioned?
Yeah. The way I look at it is it's roughly half. A lot of it is the improvement in the cost structure, expanded sales and EBITDA, and then again, this significant focus on working capital, CapEx. We're being very balanced in our approach to adjustment in CapEx. This is not a pay me now, pay me later sort of thing. We're looking at sustainable changes that we can make to every aspect of our working capital and CapEx across the business.
Maybe just in the last minute, thinking about what's overlooked in the story today. I mean, 2026 is a lot of one-time items, as we talked about, 2027 potentially some overhang with the China policy, but then you have a solidly growing lab franchise. You're adding new growth vectors with LEX in particular. Talk about elements of the story you think people are overlooking today.
Yeah, I think there's been a lot of focus on the respiratory season and China. What people miss is the underlying strength and growth of our labs and immunohematology business, which are 75% of the company, which are performing quite well and are very healthy. We're investing now in a very focused way in innovation. We're starting to see the fruits of that come to bear in terms of high-sensitivity troponin, in terms of some of these platform launches with the 450, ECL, etc., some of our new automation solutions. The underlying business is performing really quite well. I think, the other thing people should understand is that we are very focused on de-levering the company. We're at 4x now. 4.1x rather.
We expect to be around 4x the end of the year this year, and then around 3.5x middle of next year. Me and the board are very focused on looking at every corner of the business.