Here we go. Hey, everyone. Good afternoon. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst here at Morgan Stanley. Before we begin, for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. If you have any questions, do reach out to your sales rep. It's my pleasure this afternoon to host QuidelOrtho, and speaking on behalf of the company, we have Doug Bryant, Chairman and CEO, and Joe Busky, CFO. Thank you both for joining us today. Doug, maybe just to set the stage, it's been about 5 quarters since, you know, the two companies came together. Can you just talk about your key accomplishments, you know, over the last 12 months or so, and what are you most excited about as you look to 2024?
Yeah, thanks. Good to be here. Well, that's a loaded question - but, yeah, we've got a lot going on, and so I would say, you know, the obvious excitement around Savanna, several new products that are likely to be strong contributors to revenue growth, like high-sensitivity troponin, HbA1c, and a number of other menu additions as well. But more importantly, I think the thing that we're most excited about is the cadence with which we're doing a lot of things, and I can walk through some of those things for you, too. So it's not about just the home runs necessarily, it's also progress on a number of different things that essentially help us get more products in the market, help us really just run the business more efficiently.
So, you know, I'll say as an example, that a surprise and something that the whole company is particularly proud about is what we've done with the labs business. The labs business is half the revenue in the business, so being successful with that particular component of the business is particularly important. And what we've done in terms of the addition of instrument supply, as well as increasing slide assembly-
Yeah
... the reagents for those products, has been important. In the last quarter, we were up, as a result, 9%, versus the prior year quarter. Not disclosed before, but, August, year to date, we will now have manufactured more VITROS instruments than we did in the entirety of 2022.
Wow!
We are on record quarters, as announced previously, two quarters in a row, each of which was record-breaking, never having been manufactured at that level before. So we are growing share. We are taking share from a number of competitors. We are growing faster than the market, and we are improving our supply chain on a number of the raw elements that are necessary in order to manufacture these, these reagent products. So, I like what we're doing across the board in the company, but I'm particularly proud, and I know this is probably a surprise, but I'm particularly proud of what we've done in the Labs business. It shows the strength of the former Quidel supply chain and operations groups.
Mm-hmm.
And it helps thinking that we really did bring something significant to the party.
Got it. So, you know, maybe just sticking on the lab scene there, right? So, like you said, I mean, 9% growth outside of respiratory, you know, in the last quarter. Was that growth sort of pretty broad-based across clin chem and immunoassay? And then on that instrument point that you know just talked about, right, so the elevated backlog coming down, where are you in your sort of supply chain and customer readiness pressures today versus, you know, a couple of months ago? Are they sort of largely in the rearview mirror at this point?
Yeah, that's, that's two different questions.
Yeah.
I'll do the first one, first. In terms of contribution to revenue, it's been about equal between both clin chem and immunoassay. I would say the exception to it is, as China recovered-
Mm-hmm
... a lot of clinical chemistry product shipped. So except for China, the rest of the world is roughly 50/50, in terms of contribution to revenue. In terms of the things that were problematic for us, on the instrument side, I would say those are largely resolved. You know, we will, from time to time, find things that'll pop up, and we don't need to go into any detail. We have things that we still are working through. We're just getting them solved quicker.
Mm-hmm.
You know, we engaged a group of people to go into the factory of the third party and to work alongside those folks, and we've actually made dramatic improvement to their processes and have helped them out with their supply chain. So instruments, super comfortable with on the slide. We did install line 25 of the slide assembly machines. That gives us another 300 million tests per year capacity. And then we're just now installing line 26, which gives us a further 300 million. So I think we've solved some of the capacity side of things, but what we're faced with now is the challenge on various raw materials that we need, and we need to anticipate as we think that there may be an issue.
We're also doing a much better job on our procurement side and making sure that we're not so aligned to one single source... or that single or that multiple sources aren't tied back to another single source somehow.
Mm-hmm.
So we still have work to be done, but I would say most of what we've got in terms of supply chain issues on the reagent side have been largely resolved. I would say that as we finalize and we eliminate these altogether, I think it's worth probably another percentage point in growth.
Mm-hmm.
I think we're in good shape on the lab side.
Got it. And so in terms of that normalized 150 unit run rate on the instrument backlog-
Mm-hmm.
Is that something that's, that's a couple quarters out, you think, or, or perhaps even sooner than that?
Yeah. Remember, Tejas, that we said that we would expect to be through and to that level early 2024, and I would say now that we would suggest that we will certainly have gotten to that 150-
Mm-hmm
... level by the end of the year.
Okay. Well, that's great.
So that's not very far away, but-
Got it. Got it. Can you talk a little bit on, just instrument order book velocity, how that's trended for you, through the year? I mean, you're working through the backlog and the catch-up placements, but in terms of just, you know, the new orders coming in.
The new orders in the U.S. are slightly up, which is great in a business that's already doing quite well. Where we've seen the greater gains is outside the U.S., and I think there's growing traction for the program that we call our integrated strategy, where we take our clinical chemistry customers, and we put that together with our immunoassay solutions.
Mm-hmm.
We've also done a nice job on the automated side, and so I don't think there was nearly the success for early on as we saw in the U.S., ex-U.S., but now we're seeing that. So I think, you know, we're getting a little bit better traction in Europe and certainly in Asia Pacific and in China, doing extremely well and even seeing success now in Latin America. So-
Got it.
We're definitely creating demand for the product, and I think there's a number of reasons. You know, we have the lowest total cost of ownership. When you look at things like the slide itself, we're more expensive than our competitors, noticeably. But when you look at the cost of calibration and maintenance, the fact that we don't use DI water-
Mm-hmm
... you know, these are the things that when you take the total cost of actually getting a patient result, we're actually probably among the chief competitors. We are probably noticeably the lowest in terms of total cost of ownership.
Got it. Switching gears to Point-of-Care. On the COVID testing piece, you know, last quarter you brought that down, you know, with the public health emergency coming to an end in May. Of late, there's been a bit of a spike in cases with a new variant running around. Could there be potential sort of upside to the guide here on the COVID side of things? And how does that translate into a margin impact with, you know, QuickVue sort of coming down and then, you know, POC testing, Sofia Antigen, sort of going up?
Yeah. I think the way to look at the guide is look at the guide for the second half in total. It is true that demand is up. We've dramatically ramped up production.
Mm-hmm.
I'm encouraged that we've ramped it up in half the time that we would have done it last year, which tells you that our supply chain in that regard is quite robust. It also tells you that our ability to scale up and down quite quickly-
Mm-hmm
...is now, it's just part of our DNA. We have in the factory where QuickVue is manufactured, as an example, we've got 135 employees only that are full-time. They're and expected to be there for the foreseeable future, but we can very quickly ramp and get to 500 employees-
Mm-hmm
... all, validated, ready to go manufacturing products. So we can scale up, actually quite quickly. And, obviously, very recently, we've needed to do that. So that, that's just a really interesting place that we find ourselves in, because we know we're gonna be shipping and are shipping more product in Q3 than we had anticipated. What I would say for the back half total guide, though, that this certainly de-risks what we said we would do for the back half in terms of respiratory disease testing-
Got it
... for both COVID and influenza. And then further, I would say it supports the notion, what's happening right, right now, supports our assertion that COVID is just another respiratory virus, and it is now endemic.
Mm-hmm.
We should expect, therefore, moving forward, 2024 and beyond, to see $200 million-$400 million in COVID, specifically COVID-only sales. I would suggest that, with the pending launch of the combination product in the OTC space-
Mm-hmm
... that, I think that product will be a winner for us. But so your question was: Are we gonna change the guide? I don't think so. I think it's been de-risked, though.
Got it. Got it. And on the combo assay, what are the timelines for that? I mean, will it be ready for this year's flu season, or is that more for 2024?
So certainly, we expect SARS flu combo on Sofia-
Mm-hmm
... to be in market, and that product is at the FDA under a CLIA waiver-
Right
submission. For the OTC product, we expect to submit data at the end of October, potentially early November. So will it have an impact in 2023? Obviously modest-
Yeah.
But it certainly will have an impact as we move into Q1. And remember that typically, our flu seasons aren't calendar.
Right.
Our respiratory seasons aren't calendar. The viruses don't know what month it is. So, it's typically Q4, Q1-
Yeah
This is the season. And so in total, I think that we will be in time to have an impact with the combo product.
Got it. And just given what we've seen in the Southern Hemisphere, do you anticipate a relatively strong flu season?
It's a very difficult question to answer. I've looked at data previously. Actually, Zarek, standing here in the front row, remembers this, that we looked at one time, we had looked at 25 years worth of data, remember? Comparing Southern Hemisphere and Northern Hemisphere. And there is a nice R squared. It's actually 0.76, but it's not 0.9 either.
Right.
And what came first, the chicken or the egg? I don't know. But what we saw in the Southern Hemisphere was an early start to the season. It also involved RSV. And then more recently, we saw Influenza B-
Mm-hmm
... which normally we would have expected historically, even here in the Northern Hemisphere, to be in the latter part-
Mm-hmm
... of the flu season. But, in the last couple of seasons, we didn't see that flu B, so that's a little bit different.
Got it.
We'll see how that plays out here. A lot of people assume that that will be the case. We'll have to see.
Got it. Talk to us a little bit, Doug, about, you know, the double-digit growth you're seeing in, you know, Sofia, and then for the Triage business as well, and what are the cross-selling opportunities there?
Well, we put the two companies together because we had envisioned that there would be cross-selling on both sides that would be effective. We've seen just generally at the point-of-care that the cross-selling, particularly ex U.S., has been pretty impactful.
Mm-hmm.
But the short answer is, it seems to be helpful. So we have Sofia customers that are large, that we're bringing in the clin chem side.
Mm-hmm.
We've got examples of that here in the United States, and we've seen the reverse to be true, particularly ex US.
Got it. You know, you talked about this Class I recall that you had for the cardiac panel. You called it sort of a very minimal financial impact, I think, in on the second quarter call. Is there sort of any sort of reputational fallout from that in terms of, you know, going out there and being front-footed in addressing any concerns out in the field among the customer base?
Yeah, first of all, in our segment, our industry, and I think you know this quite well, that it's, it's typical to have recalls. And in fact, the better run companies tend to have recalls because we spot these things in outgoing QC, and then we go. We know where the product went, we go find the product, we retrieve the product, and then we tell the FDA about it. And then by the time you read about that announcement, we had already found this a long time ago. We've already solved it. In this recent situation, the number of customers was, was few. The number of, the number of lot numbers-
Mm-hmm
... was few.
Mm-hmm.
And so it was a really very easy recall.
Got it.
I mean, lives were not affected.
Got it.
You know? Yeah.
Switching to, you know, the Lyra weakness. I mean, when do you expect the shift from high-volume central lab testing to decentralized and automated solutions to stabilize? And how are you thinking about, you know, Savannah offsetting the Lyra headwind in sort of the second half of this year into 2024?
You're asking about just decentralization generally and about what, Savannah or?
Mm-hmm.
Okay. Well, I think the STI panel is a perfect example. You, you talk to the people that run the labs across, a continuum of, of sites that exist within these integrated delivery networks, and they will tell you that, you know, they're eager to, to change the paradigm. Right now, if you go into an urgent care or a clinic, it's highly likely that that sample for an STI panel will go to either the central lab in the hospital system or series of hospitals, a regional lab, if you will, or it goes to the big labs like Labcorp or Quest or whatever. And they're typically run on, on some big platform, either-
Mm-hmm
... one of the Roche platforms, or more commonly, actually, the Hologic Panther. And so with Savannah, we actually see an ability to accelerate the decentralization of testing, but it wouldn't be broadly across every single panel that we're launching.
Mm-hmm.
But that would be an example where it makes a lot of sense to test for the four common pathogens likely to cause a sexually transmitted infection, and to treat the patient right there, rather than send the sample to a lab somewhere else. So I think... I hope I'm addressing your question.
Yeah.
Is that along the lines of what you're talking?
Yeah.
Yeah, I've been in this industry for 40 years. And so I've seen assays that are being centralized, and I've seen those that are moving to decentralized. And I think there's a flow back and forth.
Mm-hmm.
That dynamic will exist for some time, and, when it makes sense, and technology enables people to run the test closer to the patient, at the same sort of quality that you would see in the big labs, it's likely to happen.
Got it.
Conversely, if it's a smaller volume or it's a high volume or a high value new assay that, where they call it a reference lab for a reason, you need to send it to a highly qualified lab to explore. I think the reference labs do a great job, and I think that's where they make a lot of their money, so.
Got it.
But as soon as one of us can figure out how to make it smaller and easier and faster and less expensive, that's what happens.
Right. Right. How many countries in Europe are you now live in for Savannah? And what timeframe do you expect to, you know, cover the rest?
In my head, let me see. I've never counted. It's small. It's small.
Over-
Is it four or five?
Yeah.
Okay. Just in Europe, specifically?
Yeah.
Not counting Middle East?
Not counting Middle East.
Okay. All right.
Got it. And so what is the path to, you know, broader presence in Europe for Savannah look like?
Well, first, realize we did a limited launch-
Yeah.
We actually controlled it, and we did it on purpose, and our guys in Europe actually wanted to do it this way because the worst thing in the world is to start a customer and then not be able to supply.
Mm-hmm.
So we kept it small. We also want to find out what errors, you know, we would need to fix, what things needed to be addressed. We needed to test out our customer service strategy, et cetera, and I think we accomplished all that. We did find error codes that we needed to resolve. This is not new.
Right.
Any one of my colleagues in our industry would be sitting here telling you the same thing. You launch an instrument, you're gonna find some things.
Right.
And then you gotta go fix them fast, and we accomplished that.
Mm-hmm.
We also discovered that we wanted to make some tweaks to the Respiratory Viral Panel to improve the assay performance. We did that, so we're now on our second version. And so as we're about to enter our largest opportunity, our largest market, we will have resolved some of the things that would have needed to be resolved had we not launched somewhere else first. Moving forward, I think the market in Europe, in particular, is quite different-
Mm-hmm
... than here. And, you know, we'll be involved in tenders along the way, and that will be sort of the thing that causes the timing of the launch-
Got it
There. But they now know they have all the instruments they need.
Mm-hmm.
We have two manual lines, which are making hundreds of thousands of tests per month, certainly, capable of handling the demand there. And we're gonna stand up the automated line in the middle of the year. So the middle of 2024, we will have all the manufacturing capacity that we need.
Got it
... to deliver what we said we would do in that three-year plan.
Got it. Got it. And what are your sort of key learnings from the launch in Europe so far? You've sort of alluded to, you know, things you find out only after you go live and then the need for a controlled launch.
Yeah. So in addition-
Yeah
... I would say we've learned that there are vulnerable competitors.
Mm-hmm.
They are great targets for us.
Mm.
I'm not gonna call out anybody specifically here, but we also learned that where we wanted to price the product-
Mm-hmm
... was fine. And, we weren't in some of these tenders that we won, we were not the lowest price. And it didn't seem to matter because the other criteria were more important to the customer.
Mm-hmm
... than simply price. So that we learned as well, so that was encouraging. And based on that experience, we actually took up on our model, the number of dollars per box per year that we thought would run on a-
Mm
... typical Savannah platform, in Europe.
Got it.
Joe has revised his model-
Got it
... accordingly, so.
What about sort of, you know, FDA submission and 510(k) for the instrument, and then I think you had the RVP-4 and the HSV panels. What are the timelines for that in terms of, you know, U.S. approval?
We submitted five 510(k)s at the end of July for HSV/VZV, as well as the respiratory-
Yeah
... panel. We've also submitted an EUA for the respiratory panel.
Mm-hmm.
The 510(k)s both are under active review-
Mm-hmm
... at the FDA, meaning that they've accepted the package and actually have sent us several series of questions-
Mm-hmm
... to talk about what's in the package, with the data, et cetera. And, we have not heard anything back on the EUA, which I would suggest means that the package for the 510(k) must be reasonably suitable-
Mm-hmm
... because they're pursuing that rather aggressively with us. So, I would also point to the fact that in the last month or so, we've had several FDA clearances, for example, in the labs business for, CEA-
Mm-hmm
CA 19-9, both of which are oncology markers. We've also had approval for PTH. All were reviewed and cleared in a very timely manner. So it would suggest to me that the FDA is now pretty much back on track in terms of its cadence of review and approval. So I think that portends well for us also.
Got it... And how are you thinking about menu expansion in Savannah in 2024, Doug? And help us sort of contextualize that in terms of, you know, I think you'd called out a 1% sort of Savannah contribution this year, based on the guide. I mean, how high could that go next year?
The order in which we will do the clinical trials and roll out the additional assays would be STI, followed by RVP-11, unless we move it, because we're trying to pull something else forward. Then followed by the two GI panels, one for bacteria and viruses-
Mm-hmm.
-and then the second for parasites. And then finally, for 2024, vaginitis. And then, as you would imagine, we have other syndromic panels also in development.
Right.
Those panels there, we're actually thinking about what menu do we need to actually displace this competitor or that competitor. So that next wave is more about going after specific competitors.
Got it.
And so that's sort of the cadence. In terms of what we'd expect in 2024, in terms of sales, I don't think we're prepared to provide that number quite yet. We haven't even submitted our plans with the board, right? We expect to do that in November.
Got it.
I'm pretty sure there's marketing people with in my group that would have a number for you, but it hasn't been vetted.
Got it. Moving over to just regional performance, I want to hit on China. It's about 10% of total sales for you.
Mm-hmm.
A lot of noise at the conference around, you know, weakness in China and even this anti-corruption crackdown.
Mm-hmm.
Can you just talk a little bit about what you're seeing there, and how trends have evolved, if at all, in July and August?
Yeah. So yes, a lot of talk here at the conference. In fact, we haven't had a meeting without, most of them start with China. So, what I would say, you know, we have a... Our response is that we welcome the scrutiny-
Mm-hmm.
of the anti-corruption initiative in China. We welcome that scrutiny, and I would say that I'm sure that, my multinational diagnostic colleagues-
Mm-hmm
-would all agree with me that this is not a bad thing-
Mm.
from our perspective. We have very rigid and I would say almost state-of-the-art compliance programs in place.
Mm-hmm
-that we review routinely. I'm actively involved in it. We also have very strong organization looking at FCPA as well.
Mm-hmm.
So all the things that we need to have in place for reviewing distribution agreements, understanding where the product is being shipped and at what price, we've got really nice visibility. We're shipping into a set of distributors in China called Tier One Distributors. They're highly capitalized companies that have a very strong interest in using their balance sheet to acquire our instruments, such that they can place analyzers either with the customer themselves, or with Tier Two distributors, who would then place it. So I'm not saying that we would be 100% immune to anything-
Mm-hmm
But certainly, we have every measure in place to make sure that we're following this closely. And I would say, I would be shocked if any of my colleagues in the diagnostic space, certainly, companies our size-
Got it
... would not have those similar programs. And then I would also say that the scrutiny itself does not appear to be directed at diagnostics-
Mm-hmm
-and the lab managers and this sort of thing. But I can imagine, based on my experience, years ago-
Mm-hmm
And for example, meeting many, many Chinese cardiologists, that some of the scrutiny may be directed at physicians who are potentially being incented to use certain medical devices. And I suspect that the multinationals are not necessarily gonna have a problem with it. But maybe I'm articulating my opinion too, too widely there. But I think it's an issue. We welcome the scrutiny, and I, and I think it's a, it's a good thing.
Got it. Do you envision any risk of just economic contagion from China, the markets in Europe? You know, Germany has been one that's come up in a few conversations.
I'm not seeing any evidence at this stage.
Okay.
Yeah.
Got it. Fair enough. You know, on the integration and the synergy targets, Doug, you recently took up your cost synergy target, you know, from $90 million to $130 million. Walk us through sort of, you know, what were the additional sort of pieces of that increase, and could there be further upside to this target?
That's a great question. We previously said, just for the audience, that we would do $90 million in cost synergies over a three-year window, and we would- it would be roughly a third, a third, a third. 30, 30, 30. Having gone through the first process of eliminating duplicative costs, most of which are in G&A-
Mm-hmm
... we decided to embark on another wave, another, call it Synergy 2.0, based on our experience in running the business for, you know, well over a year now. We have pretty good visibility and saw a number of things that could be improved, including this multi-layering that existed once we put the two businesses together. So the second wave now includes some headcount.... Got it. So, so 80% of wave two cost synergy is tied to headcount reduction.
Mm-hmm.
So if you think about it in that way, we will have done, instead of 30, this year, we will have done 50 million-
Mm-hmm
... in cost reduction, which fully offsets what we've experienced in terms of inflation-
Mm-hmm
On the cost side. And then we expect $50 million in 2024 as well, and then with the remainder in year three beyond that. So we said in the last earnings call, we were at $130.
Mm-hmm.
Obviously, we think there's more than that.
Got it. Fair enough. Last question here, just capital deployment, you know, beyond prioritizing the debt paydown, and I think you've talked about a leverage ratio of under 2x by year-end 2024. How are you thinking about, you know, M&A? I mean, obviously, you know, Ortho is relatively recent.
Mm-hmm.
Is it fair to say that it's, it's more sort of tuck-ins at the moment?
Primarily, I would just say that we have an interesting funnel that we're looking at-
Mm-hmm
... and we're super active. I think the business development organization is really quite good.
Mm-hmm.
I don't think there's anything out there that we're not seeing.
Mm-hmm.
And, we've got a couple things that we're interested in. I don't think anything that would cause us to be distracted from what we're doing at this time. And then, you know, longer term, yeah, there's a couple of things. If you think about it, if we're successful and we get these things done, would we be interested in broadening our diagnostic base?
Mm-hmm.
I think so. I think moving forward, diagnostic companies need to have, you know, a broader, an idea of becoming broader based. It just has so many benefits.
Mm-hmm.
Not being so vulnerable to the respiratory season would be one better example.
Right.
But yeah, we're gonna look, but we're also not going to be ahead of our skis either.
Mm-hmm. Got it. Fair enough. We're out of time, so that, that was a great overview, Doug, and-
Perfect timing.
Yeah, that's great.
Shocker. All right, thanks.
Thanks, Doug. Appreciate it.