Ortho Clinical Diagnostics Holdings plc

Today's conference is scheduled to begin shortly. Please continue to stand by. Thank you for your patience. Thank you. Welcome to Ortho Clinical Diagnostics fourth quarter and fiscal year 2021 earnings conference call and webcast. At this time, all participant lines are in listen-only mode. For those of you participating on the conference call, there will be an opportunity for your questions at the end of today's prepared comments. Please note, this conference is being recorded. An audio replay of the conference call will be available on the company's website within a few hours after this call. I would now like to turn the call over to Brian Brockmeyer, Vice President of Investor Relations. Brian?

Thank you, Operator. Good afternoon, everyone, and welcome to the Ortho Clinical Diagnostics fourth quarter and fiscal year 2021 earnings conference call. With me today to discuss our financial results are Chris Smith, Ortho's chairman and CEO, and Joe Buskey, Ortho's chief financial officer. Mike Iskra, our EVP of commercial excellence and strategy, will join us for the Q&A portion of the call. This conference call is being simultaneously webcast on the investor section of our website, and a version of today's presentation can be downloaded there. Before I begin, I will cover our safe harbor statement. Some of the statements we will make during today's call about the company's future expectations, plans, and prospects constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, which provides a safe harbor from such statements. Our use of forward-looking statements is subject to a number of risks, uncertainties, and other factors that could cause actual results to differ materially from our current expectations. These risks and uncertainties include but are not limited to those factors identified on slide two of today's presentation and our other filings with the SEC. Please refer to our SEC filings for more detailed discussion of forward-looking statements and the risks and uncertainties of such statements. We cannot assure you that the forward-looking statements we make will be realized. We undertake no obligation to update any forward-looking statement to reflect future events developments, or changed circumstances, or for any other reason except as required by law. Also during today's call, there will be a discussion of some items that do not conform to U.S. generally accepted accounting principles or GAAP. Please see slide three for a list of these non-GAAP measures, including but not limited to Core revenue, constant currency, EBITDA, adjusted EBITDA, adjusted free cash flow, and adjusted diluted earnings per share. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon, both of which are available in the investor section of the ORTA website. In addition, on today's call, we will refer to our core and our non-core business, Our clinical laboratories, also known as clinical labs, and transfusion medicine businesses represent our core business. Our non-core business is comprised of our contract manufacturing and licensing revenue. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now I'd like to turn the call over to Chris Smith, Ortho's chairman and CEO. Chris? Chris?

Thanks, Brian, and good afternoon, everyone, and thanks for joining us for the call today. It's great to be with you and to be able to share the fourth quarter results as well as the full year results for 2021. We're going to start on slide four, and I always love to start with this slide because it's the mission statement. It's our credo, because every test is a life. This is why we do what we do every single day, and we embrace this credo as a whole leadership team and our company worldwide as we go to work every single day. Just to give you an example, today we'll help over 800,000 patients around the world. I just want to thank our teammates in particular and all our professional customers out there that we partner with. With that, let's get into the fourth quarter results, which starts on slide five. First off, we have broad diagnostics portfolio. So COVID assays have not been a meaningful factor on our business throughout the pandemic as it has been for some companies. That said, we only generated $68 million of COVID assay revenue in 2021. Consequently, COVID was approximately 4 percentage point headwind on the growth in the fourth quarter and 1 percent headwind for the full year results. Given that, today we will largely focus on the underlying base business, which excludes COVID assay revenue. Core revenue excluding COVID assay revenue grew 8 percent, with particular strength in our clinical labs business, including a 4 percent headwind from the COVID test. Our core revenue grew 4 percent in constant currency. to $519 million. In addition to the underlying strength of our revenue, adjusted EBITDA margins of 24.6% is down about 130 basis points, reflecting an estimated 230 basis points of headwind from the decline of this high margin COVID assay test revenue compared to prior year. Looking at the full results on slide six, core revenue excluding the COVID assay revenue grew 16%, With strength in both our clinical, lab, and our transfusion medicine businesses, including a one percentage point headwind from COVID tests for the year, our core revenue grew 15% in constant currency to just over $2 billion, a huge milestone for the company. Adjusted EBITDA grew 20% to 548 million, representing margin expansion of 100 basis points to 26.8%, despite an approximately 60 basis points of headwind from the decline in this high margin COVID assay revenue. In summary, we concluded the year with another excellent quarter demonstrating the strength and stability of our reoccurring revenue business model in our base business. This continued revenue momentum in our business is clear result of the strong execution by our global commercial teammates and their dedication to customers and patients they serve. We talk about the importance of lifetime customer value and the long-term relationships that we build with our customers. We believe this is resonating in the marketplace and continues to be reflected in our results. Continuing with our fourth quarter performance review, let's look more closely at the core geographies excluding COVID assay revenue on slide eight. The Americas, our largest geography, grew 8%, with the U.S. commercial growth excluding COVID assays being up 7%. This was driven by strong clinical lab integrated system placements, menu expansion, and reoccurring revenue pull-through, as well as our CTS partnership in our transfusion medicine business. In EMEA, the growth, excluding COVID, was 6 percent, driven by strength across our clinical lab business, with particular strength in Eastern Europe and Middle East in the fourth quarter. Greater China grew 8 percent, with strength in reoccurring revenues, including both immune assay, clinical chemistry, and immunohematology consumables. However, Due to timing of distributor instrument placements, we had several instrument orders that did not ship in the fourth quarter. I'll expand on this more broadly in a moment. We believe our install-based growth in China of 6% and our integrated system growth of 14% are very good leading indicators for future growth. In addition, during the fourth quarter, our MU assay business grew over 30%. We're pleased with the growth, excluding COVID assay, in both our core developed markets as well as our emerging markets, which grew 6 percent and 12 percent, respectively. Growth was particularly strong in India, Latin America, and the Middle East. Looking at our core geographies for the full year, excluding COVID revenue, the Americas, our largest geography, grew 18 percent, with the U.S. up 16 percent. EMEA grew 10 percent, which is a significant result how that business has continued to perform incredibly well over the last 12 months, with Western Europe up 7%. Greater China grew 12%, and the other regions, which include Japan and Asia Pacific, were up 17%. So really strong performance from all regions. Next on slide 10, we remain steadfastly focused on executing against our three strategic priorities to drive probable growth and shareholder value, These priorities are product innovation, global commercial excellence, and operational efficiency. We continue to make progress against all these areas in the fourth quarter. Let me cover some of the highlights. Beginning with product innovation, as we discussed last quarter, we received emergency use authorization in the U.S. for our quantitative COVID spike antibody assay. We're seeing emerging adoption for testing convalescent plasma, which has created an incremental growth opportunity beginning this year. Though we still expect COVID-related revenue to be a headwind on our 22 revenue growth, we believe this new growth avenue is meaningful. Longer term, there are multiple studies underway to advance our understanding of COVID immunity, including immunity from infection, immunity from vaccination, as well as immunity from different variants. Notably, we're collaborating with academics and government agencies to develop studies to enable broader clinical utility of our quant assay. Turning to our second priority, global commercial excellence, we continue the implementation of our commercial excellence program and our growth strategy, which is driven by the penetration in the market with our integrated analyzer systems and the pull-through of this reoccurring revenue. Our integrated install base continued to grow double digits through 2021, and our reoccurring revenues ended the year of 93 percent of our total revenue. And finally, our third priority, operational efficiencies. Thanks to the strong revenue performance and the execution by our entire team throughout 2021, we further reduced our net leverage in the fourth quarter to 3.6%, and this is from 7.9% at the time of our IPO last February, an incredible result. Lastly, I'd like to comment on industry-wide supply chain disruption. Global supply chain challenges combined with the strength of our business over the last several quarters are putting increased demand on our supply chain. Like most diagnostic companies, these challenges include shortages of microchips, resins, and certain plastics, as well as freight and logistics costs, and pressure on pricing. Our management team is working diligently on adding additional suppliers, managing the ongoing flow of raw materials, and the distribution challenges, including spot rates. Though our financial performance has remained strong, we are managing instrument allocation at a regional level, and this has pushed out delivery of our instruments to some customers. We closed the fourth quarter with our install-based growth of 3 percent. However, if we had shipped all the open orders on instruments, it would have been 5 percent. Turning to slide 11, I'm really excited to talk to you about the proposed transaction with Quidel as announced on December 23rd. The HSR waiting period recently expired, and other regulatory approvals and closing conditions are progressing. And we believe that the transaction remains on track to hold our shareholder votes and close in the first half of 2022. As we said at the time of the announcement, we believe bringing Quidel and Ortho together creates a leading global diagnostics company with the ability to offer long-term value to patients, customers, teammates, shareholders, and the communities in which they serve. While the transaction is structured as an acquisition of Ortho, these are two similar-sized companies, and the leadership and the employee base will be a mix of both companies. So strategically, we're coming together more as a merger of equals structured in a way that enhances growth. Since the announcement, we've spent a lot of time talking with key stakeholders and are confident as ever this exciting combination represents the best path forward for Ortho and its shareholders. I'd like to take this opportunity to share some insights from the combination of the two companies. First on revenue visibility, excuse me, first on the revenue visibility of the combined company, as you know, Ortho has a very stable and predictable business model. driven by reoccurring revenues of 93%, usually five- to seven-year contracts, and our lifetime customer value that represents our 98% plus revenue retention rates. As you know, Quidel currently realizes a significant amount of their revenue in the U.S. Quidel's business has historically been heavily tied to the U.S. seasonal flu and more recently to the COVID trends. even as it's added new menu and test platforms such as their Savannah molecular platform that would drive a new leg of diversified growth. Like many experts and analysts are predicting, we expect COVID to be endemic and be managed much like seasonal flu going forward. So while the need for COVID testing will go away, we're projecting a more conservative view of COVID testing volumes, and we're anticipating these volumes will stabilize at a level that is meaningfully lower than where we are today. When the volumes do stabilize, we expect testing to consist mostly of respiratory panels that includes COVID and flu. And we also believe that the global diversification of Quidel's revenue stream through the global reach of Ortho's commercial team and the penetration of hospital segment with the new Savannah molecular product will provide further visibility and stability in the combined company's revenues. Second, on the growth potential. We believe shareholder value will be enhanced by the combination of Quidel and Ortho, establishing a diagnostic company with enhanced competitive position, expanded global presence, and robust product offering, serving a wide range of customers and markets with a total addressable market of approximately $50 billion. We believe the company's highly complementary world-class products and service offering will provide opportunities to capture significant growth globally through Ortho's commercial footprint in 130 countries, and approximately 2,300 field teammates, while enhancing cross-selling opportunities across a diversified customer and channel mix. Let's look at Quidel's new Savannah Rapid Multiplex Molecular Platform, for example. This is a differentiated product that is easy to use, one of the fastest times to results, has a small laboratory footprint, has significant cost advantages compared to competitors, and has a range across point-of-care and clinical labs, particularly in the mid- to high-throughput labs that are already Ortho's sweet spot where our commercial accident program has driven ongoing growth. By using our global regulatory expertise and putting that platform into the hands of our global commercial team and supporting those placements with our broad service engineers, we believe we will accelerate the launch of this compelling rapid testing platform in both hospitals and point-of-care call points. The transaction is expected to generate substantial synergies on both top and bottom lines, We estimate that the combined company will realize 90 million run rate cost-related synergies, excluding one-time costs, by the end of year three, driven primarily from operational efficiencies, supply chain optimization, and shared administrative functions, including public company costs. In addition, given Ortho's enhanced global commercial reach and expansive product portfolio, Quidel expects to drive cross-selling synergies, in excess of $100 million by the end of fiscal 2025, and a meaningful adjustment to EBITDA. Third, the combined company will have broad product portfolio and a pipeline which is best-in-class from a technology perspective. Ortho is well-positioned in the clinical lab and transfusion medicine markets with our dry-slide technology. Quidel is a leader in point-of-care and was very successful during the COVID pandemic, delivering significant growth in their install base of the SOFIA instruments. Their quick view COVID over-the-counter test is sold and drug stores all across the country is making a significant impact as we treat this pandemic. And I just discussed their Savannah rapid multiplex molecular platform. The combination of these portfolios position us to be a provider of choice for both centralized and decentralized labs and testing looking for clinical chemistry, immuacity, and molecular solutions. Fourth, we're making great progress on the integration planning. I've been able to spend a lot of time with Doug, Quidel's President and CEO, over the last eight months, and he has been in this diagnostic industry for 40 years and knows the space incredibly well. In addition to Doug, other key executives of the combined organization have already been identified, including Ortho CFO Joe Buskey and Mike Iskra, who will be the Chief Commercial Officer in the new business. The integration process will be complex. However, we're purposely delineating roles between focus group-driving integration planning and the majority of our business leaders and colleagues who will stay focused on the execution of our standalone strategies. We've engaged a well-known third-party consultant to support pre-closing integration planning, and we'll be tapping into the expertise of employees from both Quidel and Ortho to help plan and execute the integration through functional integration teams. There is little integration required of the commercial organizations, given that the U.S. focus of Quidel and the global focus of Ortho. which should minimize our commercial disruption, especially to our customers. There currently aren't areas with known integration complexity, like manufacturing, consolidation, or closing plans, et cetera. While we are currently operating as completely separate organizations, we feel confident in the clear integration path that these two complementary companies have, and we will move swiftly to execute the integration once we have closed the transaction. I look forward to continue to advise the executive team as a member of the board of directors of the new company, as well as being a special advisor to Doug and the board. Lastly, the combination of the two companies creates a great business going forward. It'll have 9% to 11% growth profile, ex-COVID, greater than 30% EBITDA margins, and more than $700 million in annual cash flow generation, and a very, very strong balance sheet with pro forma net-to-debt adjusted EBITDA of about two times at closing. after accounting and financing for the transaction. And looking at the largest IVE companies in the world, this combination of these two companies make us one of the most competitive and financially strong companies in the industry. And as you can tell, we're really excited about it. With that, I'll turn it over to Joe to further discuss some of our financial results. Joe? Okay.

Thanks, Chris, and good afternoon to everyone on the call. I'll begin with a bit more detail on our operating results for the quarter, starting with a breakdown of our fourth quarter revenues on slide 13. In the fourth quarter, we recorded total revenue of $521 million, which is an increase of 2% in constant currency. Currency translation decreased sales growth by 80 basis points, resulting in approximately 1% sales growth on a reported basis. Core revenue which excludes contract manufacturing and other licensing revenue, increased 4% on a constant currency basis to $519 million. And excluding a 370 basis point headwind from the COVID assay sales, core revenue growth was up 8%, primarily driven by the strong recurring revenue pull-through on the instruments we placed over the last couple of years across our geographies in both ClinLabs and TM segments. Now, turning to our Q4 performance by line of business, ClinLabs revenue grew 5% in the quarter, largely driven by strength in both ClinChemistry and amino assays. In the TM segment, we grew 4%, driven by strength in the U.S. and China. As a reminder, the fourth quarter growth also benefited from our new partnership with CTS, which was a new customer in 2021. The non-core revenue in the fourth quarter actually declined to $2 million. from $16 million a year ago due to the completion of certain contract manufacturing arrangements and a collaboration agreement in fourth quarter of 20. Looking ahead, we expect non-core revenue to be in the $3 to $5 million per quarter range. Turning to Q4, core performance by geography, on a constant currency basis, America's revenue increased 2%, with a 2% increase in the U.S., Excluding COVID assay revenue, however, America's was up 8 percent. EMEA grew 3 percent, with 17 percent growth in the Middle East-Africa emerging market. Western Europe was about flat year-over-year, excluding COVID assay revenue. Greater China grew 8 percent, and other segment, which includes Japan and other Asia-Pacific markets, grew 10 percent. Now, looking at our Q4 revenue by category, recurring revenue, which includes reagents, service, and other consumables, grew 6 percent driven by strength in both clean chemistry and immunoassays, as well as the donor screening market. Instrument revenue actually declined 19 percent in the quarter due to the instrument supply chain challenges Chris mentioned earlier. Turning to slide 14 for our full-year 2021 revenue results, we recorded revenue of $2 billion 43 an increase of 14% in constant currency. Currency translation increased sales growth by 150 basis points, resulting in 16% sales growth on a reported basis. Core revenue increased 15% on a constant currency basis to just over $2 billion. And excluding the 110 basis point headwind from COVID assay sales, core revenue growth was up 16%. Turning to the full-year performance by line of business, ClinLabs revenue grew 15% and Translucent Medicine grew 13%. Non-core revenue in the full year declined to $28 million from $31 million a year ago. Looking at full-year core performance by geography, on a constant currency basis, America's revenue grew 15%, including 13% growth in the U.S., Excluding the COVID assay revenue, America's was up 17%. EMEA grew 12%, including 10% growth in Western Europe. Greater China grew 12%, and other segment grew 16%. And lastly, for the full year 21, looking at our core revenue by category, revenue, sorry, recurring revenue, I should say, which includes reagent service and other consumables, grew 15%, and instruments grew 13%. Now, turning to slide 15, I'd like to comment on our fourth quarter and full-year financial performance versus the prior year. We delivered another solid quarter performance below the top line with improvements to gross margin, operating expenses, and free cash flow in the quarter. Gross profit margin for the fourth quarter was 50.5%, which is a 40 basis point increase due to currency translation, volume, and base business mix increases. partially offset by a 180 basis point headwind from high margin COVID assay revenue. Additionally, within both cost of sales and operating expenses, we have seen higher spot air freight rates as we have previously discussed. This trend continues, but we are actively managing and monitoring the situation. On a full year basis, gross profit margin was 50.7%, a 210 basis point increase. mostly due to currency translation, volume, and lower manufacturing costs. Moving down the P&L for the fourth quarter, sales, marketing, and administrative as a percent of revenue increased 30 basis points to 27.7 percent, and R&D as a percent of revenue increased 70 basis points to 6.7 percent as we continue to invest in our test menu and new platforms, most notably our DryDry platform. And for the year, Despite an increase in public company cost, sales, marketing, and administrative expense as a percent of revenue decreased 50 basis points to 27.2 percent, and R&D as a percent of revenue decreased 20 basis points to 6.2 percent. Excluding a $7.5 million upfront payment to quotient in 2020, however, R&D as a percent of revenue would actually have been up 20 basis points. Looking at adjusted EBITDA margins, we had 24.6% margin for the fourth quarter, and it's down 130 basis points, including an estimated 230 basis point headwind from the decline in high margin COVID asset revenues. Margin expansion excluding COVID asset revenue is therefore 100 basis points better and is underpinned by positive base business mix. efficiency improvements, and the successful execution of our value capture program. For the year, adjusted EBITDA margin of 26.8 percent is up 100 basis points and would have been up 160 basis points, excluding the decline in high margin COVID asset revenue. Net interest expense for the quarter was 33 million, a decrease of 16 million as anticipated due mainly to lower average outstanding debt balances. Our provision for income taxes was $5 million of expense in the quarter compared to a benefit of $11 million in the year-ago quarter. For the full year, net interest expense was $146 million, a decrease of $52 million, and our provision for income taxes was $26 million of expense compared to a benefit of $13 million in 2020. Our adjusted earnings per fully diluted share for the fourth quarter decreased a penny year-over-year to $0.18, including a $0.06 year-over-year impact from the previously mentioned COVID headwind, as well as a negative $0.07 impact from the increase in our share count, resulting from the February 2021 IPO. Our adjusted net income actually increased 47% year-over-year driven by our solid operating performance as well as lower interest expense. And so excluding the COVID assay testing, and normalizing the share count for the IPO, our Q4 EPS would have been up 12 cents versus the prior year. On a gap basis, we reported a net loss per share of 4 cents compared to a net loss per share of 28 cents in Q4 of 2020. For the full year, our adjusted earnings per fully diluted share increased 46 cents year-over-year to 80 cents, despite a negative 13-cent impact from the increase in our share count resulting from our February IPO. Our adjusted net income actually increased 266 percent year over year. Normalizing the share count for the IPO, our full year adjusted EPS would have been up 59 cents versus the prior year. On a GAAP basis, we reported full year net loss per share of 24 cents compared to a net loss per share of $1.45 in 2020. All right, now looking at free cash flow, Capital deployment and balance sheet on slide 16. In the fourth quarter, we generated $73 million in adjusted free cash flow after funding $31 million in CapEx. For the full year, we generated $260 million in adjusted free cash flow after funding $58 million in CapEx. Our day sales outstanding came in at 46 days, an improvement of 16 days compared to the fourth quarter of last year. Now, this includes the securitization of $75 million of our US AR in an off-balance sheet transaction, as discussed in prior quarters. And without the benefit of this financing transaction, our DSO still would have improved by three days compared to the fourth quarter of last year. And our strong cash generation enabled us to continue to deleverage our balance sheet and reduce our net debt to EBITDA ratio to 3.6 times, down from 3.7 at the end of Q3, and down from 7.9 at the time of our IPO in early 21. We ended the quarter with net debt of $2 billion, including cash and cash equivalents of $310 million. We continue to expect to reduce this leverage ratio by at least a half turn a year going forward as we move towards a more normalized leverage range of 2.5 to 3.5. Lastly, turning to slide 17, I want to make a few comments on our outlook. So, given the pending combination with Quidel, we are holding off on providing detailed guidance until the transaction closes. However, I'd like to provide you with some directional color on how we're viewing market conditions. Clean lab utilization trends are expected to improve as we move through 2022. Transfusion medicine markets have still not fully recovered to pre-COVID run rates as global blood supply shortages persist and labs remain focused on fighting the pandemic. We expect China to grow low double digits in both the first half of 22 and second half of 22, but due to instrument supply timing, we expect China growth to be about flat in the first quarter of 2022. And then lastly, inflation and global supply chain disruptions are interconnected as supply chains have not been able to catch up to the strong demand for our products. This certainly is not unique to us, and we're seeing these impacts across transportation costs, labor, manufacturing, commodities. These supply chain challenges are most acutely affecting our instrument placements, as Chris mentioned earlier. And through ongoing actions we discussed on the third quarter call, we expect the instrument supply chain challenges to moderate in the second half of the year, and we expect our integrated installed base to continue to grow double digits each quarter in 2022. In light of these dynamics, we expect 2022 core revenue excluding COVID assay revenue will increase at mid single digit growth rates on a constant currency basis. In addition, I'd like to provide assumptions that will be helpful for modeling purposes. We expect our COVID assay revenue to be in the range of 25 to 35 million in 2022 compared to the 68 million we did in 2021 representing 150 to 250 basis point headwind on total company core growth. And at current FX rates, currency translation is expected to negatively impact sales growth by about 50 to 100 basis points. There are no differences in the number of billing days in 2022 compared to 2021. Next, given that our contract with CTS went live in Q1 of 2021, we expect growth in our TM business to normalize to be more in line with the market in 2022. We expect four-year sales, marketing, and administrative expenses to grow at a rate slower than sales. And as we've been saying all through 2021, for every percentage point of core revenue growth, we expect our adjusted EBITDA margin to grow by 1.2 to two times, excluding COVID assay revenue. Net interest expense is expected to be in the range of 120 to 130 million with most of the decrease on the fourth quarter run rate to be in the second half of 2022. Cash taxes are expected to be about $25 million, and we expect to generate approximately $200 million in free cash flow. So with that, I'll turn the call back now over to Chris to make some summary comments. Thanks, Joe.

And look, just in summary, I just want to kind of talk about, you know, kind of how things finished year. It really was an amazing year for the company where our quarter revenue grew 15% and really that base business or excluding COVID, we grew 16%. As Joe mentioned, we're expecting mid single digits growth, ex COVID related going forward. And we really are excited about what the acquisition of Quidel means to both those companies, because we think it does create significant upside for everyone. And on that, let's, Brian, move it back to you, and we will move to Q&A. Thank you.

Operator, we'll take your first question.

Our first question comes from Tejas Savant with Morgan Stanley.

Hey, Tejas, how you doing?

This is Neil on for Tejas. Doing well. Good. Good. Starting with the Tidal transaction, is there anything you started working on to prep for the integration ahead of close?

Yeah, you know, look, Mike and Joe are in the room, and I would just tell you, I mean, I think that we, I would say one of the biggest things we did is we took one of our best executives, the gentleman that ran the IPO, Bob Dunn, and he's running the integration team for us. We pulled him out of his day job, and he's on this now, you know, 24 hours a day, seven days a week. But Mike and Joe, do you guys want to talk a little bit how you're partnering with Randy and Rob? So there's two executives from our side, Mike and Joe, and two from the Quidel side that are working together. hand-in-hand on that, but do you want to talk a little bit about where you guys are going, and what we're doing on the integration?

Yeah, sure, sure. So, you know, we have a steering team, which is comprised of Doug, Randy, me, and Mike, and Rob, and then below that, there are two leads on each side. You know, Chris has mentioned the lead on our side, and the Quiddell side has equally a talented person on their side leading, and then we've got functional leads below that, and so, you know, there's been several meetings so far, We've brought in a service provider to help us stay on track with the integration process, and I would say it's gotten off to a very, very good start. We've identified most of the day one deliverables, and we're just driving towards meeting all those needs.

Yeah, I think that being said, why we're going to have a dedicated group focus on it, and really helping to do those work streams, it's also important that we continue to run the day-to-day business. And so that's why I think we're carving out specific people and subject matter experts or super users to be on that team.

Got it. Very helpful. And then a quick one on China. Have you seen any recent impacts from zero-tolerance COVID policies, such as site access issues?

You know, we really haven't as of yet. I mean, I know that, you know, I think what happens in China, you'll see these one-off things happen. Like last quarter was the tender in one of the provinces, and it really did an impact. And we really haven't seen an impact to our business yet. Our business continues to do really well there. I mean, you saw the growth on the integrated placements. You know, MUSA up 30%. I think they're, you know, the reason it was a little bit of a challenging quarter was the shipment of instruments, but mainly to distributors. Because remember, in that market, we really almost go through box movers. So our stuff will go into a distributor and then go out. So very different than shipping an instrument into a hospital. For example, in the US where we have a G3 account where we won a competitive bid, there we're really backfilling inventory with distributors. But we haven't really seen an impact there on the zero policy.

Got it. And, you know, while we're on the topic of geographies, can you tell us about your progress and how it's evolving in high-growth regions like India and Latin America? I think, for example, last quarter you mentioned share gains over large multinationals in India driven by your field team.

Look, I always feel like I planted that question with you. So just to give you an idea, I mean, Latin America for the year was up 21%, up 27%. in the quarter, seeing incredible growth in Brazil, you know, over 30% for the year, Mexico over 20% for the year. So I'd say Latin America continues to do really well. We have an amazing leader down there running that business. And I would say for emerging markets is at the front end of the integrated strategy. And we're really seeing that nice pull through. If you go over kind of to India, you know, just to give you an idea, we grew over 50% this year in India. It was amazing growth. Like I think the 50% may be, So what we do is we go back and compare it to 2019. Our growth in India compared to 2019 is up 26%. So, I mean, just continued robust growth in these emerging markets where the teams, I think, are really doing a great job executing. And then I think Mike bringing these, what we call edge internally, but these commercial excellence programs in and helping to optimize the sales force has really gotten this really nice pull through.

Got it. And then just one last one for me, switching topics again. So how should we be thinking about the potential contribution from the antibody spike assay? And with the current expectation for assay sales for COVID, how should we also be thinking about your previous expectations for a notable headwind to gross margin expansion this year?

Yeah, we did talk about the headwind, but Joe, do you want to talk about a little bit how you see that impacting financials in 22?

Yeah, I mean, we're expecting, as I said in the prepared remarks, we're expecting the COVID asset revenue for 22 to be in the $25 to $35 million range. So it's going to be about 150 to 250 basis headwind on the top line. It will have an impact for sure on the gross profit expansion and EBITDA expansion. But again, if you look at the the gross profit and EBIT outline post-COVID or ex-COVID, you know, we'll still hit those expansion numbers that we've talked about. But, you know, maybe I'll let Mike talk a little bit about, you know, of that 25 to 35 kind of revenue, how that's going to play out in 2022. Yeah, thanks, Joe.

And I think one of the things for us to just continue to communicate, you know, COVID is very unpredictable, hard to forecast. So as we've done, I think we align on a number we feel comfortable with in the financial forecast. But I don't think that fully reflects what our true efforts are. We have a number of studies underway, as Chris mentioned in the commentary. We see opportunity for the quantitative antibody test that's out there. And so, we'll continue to push on that. I mean, most recently, a good example is that we've seen sort of a reemergence in the U.S. for convalescent plasma. We've played a big role in that, testing for that over the number of years, leveraging our great partnerships with our donor screening customers. And so that may continue to be an opportunity, not just through the Omicron variant, but others to come. So we continue to invest in those things, and if a few things go one way or the other, there could be upside to those numbers.

Yeah, and I think especially around this quant, I mean, there's a day where people are going to want to know what their immunity levels are, and that's why I talked about the the clinical trials, which really need to come in front of the sales, but working closely with some government agencies and some large university hospitals on clinical trials that really give you what do you do with that quantitative number on immunity once you know it. And I think especially as you think about is there going to be another vaccine nine months from now? When do you get that vaccine? How do you test? And so, look, again, I think we've always been conservative on COVID. We'll continue to be conservative on the COVID number, but if some of these things hit in 22, it would be incredibly helpful.

Our next question comes from Vijay Kumar with Evercore ISI.

Hey, Vijay. Hey, guys. Hi, Chris. Thanks for taking my questions. Two for me. Maybe one big picture, Chris. On the deal, you did mention shareholder approval coming up in the first half. Look at the stock price here. It's well below the deal price, 30% below. Perhaps some of it is a mark. I'm just curious how you would think about this market. a shareholder, a work upcoming, have confidence, both the clinical and getting the pool. And what is the investment community missing, Chris, just on this transaction itself?

Look, Vijay, I know you've been following the company since the IPO, and I think you really do a nice job of digging into the business. And I think you're probably as surprised as where we are with the share price and where investors have viewed this deal. I think strategically, candidly, I don't think there's a better deal out there. I mean, we're a unique market leader in the central labs, especially of what I would call these kind of 250 bed to 500 bed hospitals. I think if you look at Quidel, one of the world leaders in point of care, which really doesn't have a distribution arm outside the United States, which we now bring them. And I think testing is going to become more and more decentralized. And for us, having a new platform, a molecular platform. So look, I think strategically it makes a lot of sense. Look, as far as the shareholder vote, I will tell you, look, we're doing calls with individual shareholders, both Doug and I, with our teams to kind of try to walk through the strategy. You know, sometimes when something like this happens, it takes telling the story one or two times for people really to understand it. And look, that's on us to make sure that they really understand the strategy. But I think you had two very different companies. You had a high growth company with no debt. And you had us, which is really more of a predictable mid-single digits company with a lot of debt. And so if you love the high growth, no debt, or you love the other one, you may not like it. And so I think part of it's just educating the financial markets. Look, COVID's made it tough. I would have loved to, and we still are trying to do this, get us all you know, on an airplane or in a Winnebago and go out and do a road show and sit in front of people and have them, you know, a chance to talk about it. But I think it's been more about an education process because when you really look at the strategy, I don't know that there's a better deal out there.

That's a helpful perspective, Chris. And, Joe, maybe one for you. The guidance, you did mention some supply chain impact. Is the guidance making any top line impact or any gross margin impact? Because I look at this. operating leverage. There is some EBITDA expansion. I'm curious, is that coming from gross margin or is that perhaps more in fiscal 22?

Yeah, hey, Vijay. The outlook that I just gave in the prepared remarks is inclusive of the supply chain challenges that we've talked about today and on the last quarter call. We believe that the way we are managing the challenges and cutting costs in other areas and passing on the increased cost to customers where we can, that we can still hit the guidance that we've talked about for the last year or so, which is mid-signal digit top-line growth, ex-COVID, and EBITDA expansion in the 1.2 to 2 times that revenue expansion. And we still feel pretty good about that. And so once the deal closes, we will give you know, more granular, more specific guidance for 2022. But we feel pretty good about the long-term guidance we've given out for the last 12, 13 months and sticking with it as we move, you know, move through 22, despite the supply chain challenges that we've talked about.

Thank you, guys.

Our next question comes from Tycho Peterson with J.P. Morgan.

Hey, Tycho.

Hey, thanks. Hey, Chris, can you talk a little bit about customer feedback on the deal? You know, any different from IDNs, you know, versus traditional hospital labs in terms of excitement, any areas of pushback? You know, how is it resonating as you're out talking to customers?

Yeah, look, Tycho, I think the place where I've heard the best comment has been around the Savannah and the molecular opportunity that we're going to have. I think if you think about a lot of this molecular, which used to be outsourced, you A lot more hospitals are, especially post-COVID, bringing that in. So I think there, I would say the second component is the service that we're able to bring. So a lot of these molecular companies don't have the service organization that we have. And so I think that has created a positive. I probably have not had as much on point of care. Mike's here too. Mike, do you want to talk a little bit about any other additional customer feedback you guys have been getting?

Well, I think in general it's all positive. Again, the biggest overlap is the U.S. Quidel is very well known, very strong, and does a nice job with their business, as do we. I think there's certainly an opportunity for a customer to take that combined experience, and we're seeing the fact that they would like to purchase all those products through one company will help, right? That's a benefit. Ex-U.S., what we see is a lot of our customers that we've talked to really, as Chris said, like the idea of accessing new products that they may not get from us today, and some products may not be available in their market yet. So all in all, I think it's a good reception from customers. I think, as always, customers, some of the feedback that I would say we listen to and are paying attention to is they're concerned about distraction and disruption, which I think comes back to one of the points that both Chris and Joe made. Both companies have agreed that we're going to limit who's involved in integration up front so that the vast majority of our people are not distracted. I think that will be important. So we recognize that need. I think we're doing all we can to meet it.

And then thinking a little bit about the synergies here, any updated thoughts on kind of porting over some of their content to your products and vice versa? Is that factored into any of the synergy targets? And then I think you mentioned on manufacturing, you know, you haven't planned on real consolidation here in the near term, but how are you thinking about that opportunity long term?

Yeah, Mike, why don't you take that?

Sorry, could you repeat the second part of your question? I got the first part.

Manufacturing and, you know, maybe leveraging their crawl-back facilities as COVID demand drops down.

Yeah, so, Joe, you may want to talk about the manufacturing piece. I'll take the first piece. When you think about the synergies we talked about on the cost side and the revenue side and the combination of other company, that's really taking what's in play today with both companies, leveraging each company's footprint, commercial capabilities, product portfolio. What you don't see that I think you touched on that I think is a real upside is when we put the two R&D companies together, and one that's been talked a lot about is when you look at our dry slide format, its ability to play in a point-of-care space, in a decentralized testing space, and you look at Quidel's ability to deliver instruments, manufacturing instruments that fit that space, we see that as a real opportunity. Those are all upsides. We did not bake them in. Those are things that we will be looking at implementing, you know, post-close, and I think are future opportunities.

And then, Tycho, this is Joe. In the manufacturing part of your question, I know this is a question that Doug and Randy have gotten as well on investor calls, and, you know, we think the same in that there's no plan at this point to create synergies through manufacturing. That's not part of the $90 million. However, down the road, as we continue to pull these businesses together, there very well may be an opportunity there. But at this point, there's nothing really in the works.

Yeah, I would say the one, Tycho, which may be interesting, is we've started the process in India with our Follow the Sun kind of shared service center. So we'll now think about that globally of the two companies. And we are... looking at a lot of stuff in China from a manufacturing, so I think there would be some interesting stuff there. And then finally, we've been pretty clear, like our business has grown significantly fast, and we're expanding all of our manufacturing facilities. And I think when you look at that next expansion, if it's a situation where Quidel has a space and we don't, we would look at doing something there. But there's nothing formal.

Okay. Thank you.

Thanks, Tycho.

Our next question comes from Derek DeBruin with Bank of America.

Hey, Derek. Hey. Hey, hi. How are you? I jumped on late, so my apologies if you covered it in your prayer remarks.

No, that's why we made you be like the fourth question. We had to push you back a little bit on the question. I'm just kidding. We didn't know you joined late, but yeah.

Yeah, so my apologies if you covered this in your prayer remarks, but we've obviously been getting a lot of questions on the buy China, the buy local question. there and for pushback. We've seen some diagnostic companies have made some noise about this as well. Are you seeing any sort of like pressure in that market, you know, given that there are local options for both clinical chemistry and immune assay platforms?

Yeah, look, I would say there is a lot of discussion going on on that in China. And we've been talking with government officials. I think we've talked about Iris Lin before. We have an amazing president or leader in China. So we are very far along on a couple of projects. One is an instrument. Our next kind of low-volume instrument is well under development, probably nine months under development. And we've talked publicly about this, that it'll be made in half the time for half the cost. And so that has started. In addition, we have started a project with one of our largest distributors, which is an mu-assay development company. So those two things are underway where we would bring out a number of assays with that partner. That being said, I will say that we are in the evaluation process of this by local, by China, and what can we do with our existing, mainly around instruments. And so there's a big work stream that's been going on probably for about three months, because it is why we have not lost any business or any tenders. We believe that by the time you get to the end of next year, it's going to become much more significant, and all diagnostic companies are going to have to have a solution. Mike's working really closely with it. Mike, do you have anything else to add for any of those three?

Yeah, so, Chris, I think we've had a couple of initiatives underway that are now happening. We continue to monitor the situation. And what I would say is, Derek, the market opportunity for us in China, despite some of these programs that we're hearing about, isn't limiting the opportunity so much so that we can't accomplish what we've projected here. But what we know is and we anticipate is that's going to get more challenging over time. And that's why we're doing all the things Chris said. It does go across a number of fronts. It is one of our core strategic focus items that we've been working on. So what I think the long story short is we expect we will have a presence and a capability in China that's going to meet whatever needs are required to continue to sell and grow our share.

To give you an idea, Derek, we have 10 major initiatives for the company for the year. And China, like it literally is pulled out as one. We don't have any other region where we would have that kind of thing where it's as much fully integrated. And that is kind of how we're running that business there with the president of China. So we'll continue to keep you posted. But I do think it's real. And for us, it's the second largest market. You know, seven years from now, five years from now, it'll be the largest market. So we realize we've got to be in front of it.

Hey, Derek, I would just add to what these guys said just to continue on the point. A lot of our business in China goes to distributors and is sold to hospitals where there's non-government funding, which helps in the situation where they're not following these buy local rules. And in addition, our business is big enough in China that There's lots of parts of China that aren't following these requirements. So to Chris's point a minute ago, we're really not seeing any impact to our business. Just the bottom line.

Great. Thank you very much.

Thank you, Darren.

Our next question comes from Matt Sykes with Goldman Sachs.

Hey, Matt. Hi. Hey, good evening, everybody. Thanks for taking my questions. Kind of similar to Derek's question on China. I mean, you guys have talked about trying to replicate what you've done in the U.S. and China in terms of transitioning customers to integrated. But I'm also curious, just given how much of the value of your platform is to Coidel and the combined company, can you talk a little bit about your expansion in China and some of the new customers and what portion of that growth that you've seen in China, which has been impressive, has been from China kind of existing customers purchasing more, moving to integrated versus establishing new customers in China.

Yeah, so Matt, we didn't show it today, but we've shown this slide before where we show the penetration rate of the integrated analyzer, and China's actually our second best really country region for integrated. So I think they've done a very nice job, and that's why you see things like the MUSA business there being up over 30%. this quarter. So again, I think they're following that playbook incredibly well. It's a little bit of a different model because while we have a direct sales force and we'll have 400 people direct in China, we still go through distributors. So it really is a partnership. And I would say where our growth has really occurred is moving over the last 24 months into these tier two and tier three distributors, which is hospitals that are further away from kind of the centralized So I think that has worked really well. I would say that I think one of the biggest exciting opportunities for our merger acquisition, whatever it is, is the ability to get some of these Quidel products into China and through our distribution channel in the way that that market's growing. So I'm really excited about that. I know Mike's been working really closely with Iris on some of these programs, and it's disappointing that we haven't. done on Investor Day because Iris was one of the ones we were going to bring in to speak at the Investor Day, but we haven't done that yet. But Mike, you want to?

So the answer is all fronts, right? So all fronts are driving the growth. Chris, I think you hit on the big point. You know, if you look at the immune asset growth that's coming through, a lot of that's pulled through on integrated. We've talked about a program that China does. Again, in those top tier hospitals, we are in the stat lab. And part of the team's effort there is move testing where the laboratory and the clinicians can benefit from faster turnaround time to the stat lab on some key immunoassays, and the team's executing well. So that's driving growth, same-store sales. Again, as the market expands, we're pushing down into those tiers where we can move from a stat lab to a routine player. And if you look at where the development and opportunity is coming from in China, they're pushing out more care into the communities, which really moves for Ortho, moves a lot of that size testing to what we call our sweet spot. So we believe there's a lot of opportunity for us still there. And now we come back to the Quidel question. You know, that positioning in the STAT labs is a great spot to be when we take a look at the Quidel portfolio of products. So, you know, one last area of focus for us is, you know, we have some differentiation ability in pediatric and geriatric. And so one of the opportunities, there's a focus on maternity hospitals being built. We have a good value proposition there. that we expect is contributing to some of our growth, and we'll continue to help that in the future.

Great. And just one quick follow-up. I know you guys talked about $100 million in cross-selling synergies by 2025. Have you guys talked about what portion of that would be international or broken that down anymore in terms of regional contribution to the synergies?

Yeah, I don't think we've declared the percentages, but Mike worked really closely with that. We brought in an outside consulting firm as we went through due diligence. Mike, do you want to talk about how you broke out the categories of growth?

Yeah, and just for a quick – we triangulated. Both companies did separate models on growth. Then we brought in a third party and then came to our final number that we used. So I think pretty well thought through. You're looking at probably about 80% of revenue synergies come from ex-U.S., And of that, the main biggest one we're looking at is Savannah. Savannah is probably 80% when you look at it from a product view.

Great. Thank you very much.

Our next question comes from Luke Sergot with Barclays.

Hey, Luke.

Hey, guys. Great. Thanks for taking my questions here. So when you talk about the instrument slowdown in the quarter, Just from a modeling and a theoretical perspective, how long does the instrument growth need to be weak like that before it actually starts hitting the integrated conversion into the actual increased pull-through?

Yeah, look, it depends. So as we've discussed publicly prior is about 50% of our instruments are cashed. and about 50% of those instruments are reagent rentals. So look, without question, you're exactly right that if we think we're going to ship an instrument in 30 days and we ship that instrument in 90 days, it's a challenge. I will say this, Luke, there's a big difference between... Remember, a lot of our business is taking existing instruments, contract expires, and we upscale it into another instrument. So in those cases, we're extending... agreements, but I would say the places where it would be a challenge, which you're talking about, is what we call our G3, our competitive accounts. From a modeling perspective, Joe, do you want to talk about the impact? What would that be if it delayed 30 days? We have never really declared what that kind of stuff is.

We've not really talked publicly about that. I don't know.

Yeah, it was just more directional, right? Like these are long-duration contracts, right, 17-year average contract. Yeah, yeah, I know. I'm thinking 17-year contract, one quarter down, shouldn't really hit it.

Well, remember that our average customer on an integrated is pushing 14 years. So, I mean, the cool thing about us is when we get a customer, we don't lose them. But, Mike, go ahead.

All I was going to say, Luke, is we've talked about a rate for some time of 3% to 4% overall install-based growth. in needing integrated double digits. As you guys have heard now over the last year plus, we've been right in the middle to just above middle of the teens. And so we've been outperforming, and that's because of retention and competitive wins. Even if we drop into the 11, 12% range on integrated, that's still well within our model and our projections, right? So I think that we have a dip, but over time, we're going to still be where we need to be in those double digits.

Yeah, and I think it got lost kind of, Luke, in the quarter. I mean, the quarter was actually really a pretty good quarter, but like when I said our install base was 3%, we kind of say we want to be in 3 to 5, but if we'd shipped the instruments that we had orders on, it would have been 5+. So we actually had a good order, so I think the pipeline is robust. And look, a lot going on to get those instruments out.

Yeah, that was my follow-up, which is going to be, can you just give us an update on what that pipeline looks like? Any... you know, where there's extra demand or, you know, any customers that have kind of pulled back a little bit because of Omicron, any update there is helpful for thinking forward.

Yeah, look, at this point, we have not lost any business. You're saying have we lost business because of the delay?

No, either that or just give us an update on the actual funnel here because if you're not able to get to the sales or because of Omicron, just any type of weakness there to the pipeline.

Yeah, so look, I would say that a lot of manufacturing plants around the world, including ours, has been hit with Omicron, right? Or like you get COVID. So that definitely has had it. I would say it's more around the supply chain. And the way that I, you know, if you kind of think about this, you know, it has not really impacted existing, because you're signing a five to seven year contract with us. And like you said, if it's a month later than you thought, it really hasn't impacted our ability. I think what's happened candidly is like everything in our supply chain, this company three years ago was built to grow 1%. And I kind of kid our sales organization. If there was no supply chain challenges out there and we grew the business 15%, it's probably okay. Or if we were the old company that only grew 1% and there's supply chain challenges, we're probably okay. But when you're growing a business 15 plus percent, emerging markets well above that, and we're also managing these supply chain challenges, I think what you saw is kind of that it all came together in the fourth quarter, especially in the instruments, you know, that our team has done a fantastic job. So the instrument flow is significantly higher than it's been before. But I would say, again, this is all manageable because of these relationships and partnerships, and you're looking at a five- to seven-year contract, and you're looking at a 30-, 60-day delay. So it hasn't negatively impacted any of it.

All right, thank you.

Yeah, and we'll take one last question, Operator.

This question comes from Yi Chen with HC Wainwright.

Hi, thank you for taking my questions. Could you give us some additional color on the planned manual expansion in 2022 in various geographic areas and also in clinical laboratories versus transfusion medicine and whether the plan could be affected by the merger? Thank you.

Mike, you want to take that?

Yeah, so I don't expect the plan, the integration, to cause any challenges to near-term product release. We've talked about probably 20 to 30 new or improved assays over the next few years. That continues to be the case. And, again, I think, you know, if anything, we'll be looking for ways to leverage more menu for our customers as a combined company. But I don't think that anything that we're currently working on in that timeframe comes off. Major things that we have coming for Calcitonin will be launching in China. Hemoglobin A1C on a slide we just released XUS. And first orders are coming in there. That's very exciting for us. And then we expect to release that later in the year for the U.S. as well. And then there are a number of smaller runners that we will release to round out our menu capability in 22. But nothing that's happening through the integration that would cause any concern to what we deliver in 2020.

Yeah, I would say the growth strategy is unchanged. I mean, we're going to continue to focus on integration strategy, and that's unaffected by the deal with Quidditch.

Yeah, and we still have 20 to 30 tests on the pipeline over the next three years. Okay, thanks, Steve. Hey, guys, I think we are out of time. But listen, we really appreciate just you taking the time today and the questions and walking through the fourth quarter of the year with us. And we'll continue to, I know we're going to have some one-on-ones with you guys, but we, again, appreciate the coverage and we'll look forward to talking soon. Take care.

This concludes today's conference call. Thank you for participating. You may now disconnect.