QuidelOrtho Corporation

To Quidel Ortho, third quarter 2023 financial results 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 remarks. Please note that this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations. Please go ahead.

Thank you. And welcome to the Quidel Ortho third quarter financial results conference call. With me today to discuss our financial results are Doug Bryant, Quidel Ortho's president and CEO, and Joe Buskey, Quidel Ortho's chief financial officer. This conference call is being simultaneously webcast on the investor relations page of our website, and a version of today's presentation can be downloaded there. Before we begin, I will cover our safe harbor statement. The statements we will make during this call that are not strictly historical, including the company's expectations, plans, Future performance and prospects are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a safe harbor for such statements. Forward-looking statements are subject to a number of risks and uncertainties and other factors that could cause actual results to differ materially from those expressed or implied in these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors identified under risk factors in our annual report on Form 10-K for the fiscal year ended January 1, 2023, and subsequent reports filed with the SEC. Please refer to our SEC filings for a 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 or are implied by our statements will be realized. Furthermore, such forward-looking statements represent management's judgments and expectations as of today. Except as required by law, we undertake no obligation to update any forward-looking statement or any time-sensitive information to reflect future events, developments, or changed circumstances, or any other reason. Also during today's call, we will discuss certain items that do not conform to U.S. generally accepted accounting principles or GAF. Please see slide three for a list of non-GAF measures. Reconciliations to these non-GAF measures to their most directly comparable GAF measures are included in the appendix to the investor presentation and the press release issued this afternoon. both of which are available on the investor relations page of the Quidel Ortho website. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth rates given on today's call, are given on a comparable constant currency basis. With that, I'd like to turn the call over to Doug Bryant.

Thank you, Juliette. Good afternoon, everybody, and thank you for joining us today for our third quarter earnings call. Let me first take a moment to welcome Juliette to our Quidel Ortho team. As we continue to execute on our strategy to increase shareholder value, Juliette's expertise in the medical technology sector and her 25 years of experience managing investment community relations for publicly traded companies makes her an ideal choice to lead our investor relations function. We're committed to transparently communicating our progress to the street and excited to have her on our team. And for those of you that have known me a long time, you recognize that I don't sound normal. Let me just say that Having suffered through this over the weekend, we are definitely in a respiratory season. And it didn't start in my house. And I note that recently the CDC published that ILI is now over 2.5%, so technically I guess we are in a respiratory season, or at least at the beginning of it. I'll press forward though and hope I can be heard and understood well. Turning now to our third quarter financial performance and as noted in our pre-announcement, we delivered ahead of our guidance and street expectations. We're forging a path to durable growth and there are many proof points on our progress in these results, including our ability to meet the earlier than expected respiratory season demand and the continued strength of our core businesses across all geographies. I'm pleased to report third quarter revenue of $744 million with adjusted EBITDA of $169.2 million and adjusted EBITDA margin of 23%, which was up sequentially from Q2. During the third quarter, we generated $53 million in adjusted free cash flow, which is another testament to the strength of our business. This quarter we paid down another $52 million of our total company debt, and year-to-date we have paid down $175 million in debt. We believe that these efforts will fortify our balance sheet and give us greater flexibility to invest in our long-term growth. We are confident in our ability to deliver on our revenue growth targets over the coming quarters as we execute with speed across our businesses. There's no question that we're operating in interesting times. If you look at trends in the healthcare industry, they point to a greater need for diagnostic testing. Near patient care settings and rapid results are more important now than ever before. Recent news around the adoption trends of new COVID-19 vaccines and the use of GLP-1 drugs has fueled speculation about the reduction of future demand for diagnostic testing. In our view, there's nothing further from the truth. In fact, patients deciding to forego getting the latest vaccines could result in a higher number of COVID-19 cases and thus likely higher levels of testing. Nearly 82% of eligible Americans received at least one COVID-19 shot since the vaccine became available in late 2020. The U.S. Department of Health and Human Services reports that only 7 million Americans have opted to get the bivalent booster since mid-September. While we hope for greater adoption among all eligible people, we also recognize that only 51% of eligible Americans received a flu shot in 2022. These statistics are a stark reminder that while the medical technology to severely slow the spread and severity of these diseases exists, COVID-19 along with the flu and other respiratory viruses we test for will remain present in the general population for decades to come. Turning to the case of GLP-1 drugs and their use in diabetes and obesity, While our A1C and renal testing business is small and we do not expect any material impact, it is important to remember that first, these drugs are only approved for a select portion of the population and come with very serious long-term side effects that are only beginning to be understood. Second, these medications are presently not covered by private insurance or Medicare. With nearly 65 million Americans under Medicare coverage today, These patients must pay out-of-pocket for these medications, and for many patients on fixed incomes, these medications are simply out of financial reach. However, for those patients where a GLP-1 is being administered, we could continue to play an important role in their care journey. Prior to prescribing any metabolic-based medication, doctors may order our laboratory test to establish a baseline and would continue to do this in six-month intervals for the duration the patient remains on the drug, which could be several decades. Further, heart disease remains the leading cause of death in America, and unfortunately, it's growing internationally as well. While we'd welcome the idea that fewer patients would be affected by heart disease, we do not see a significant change in the need for testing in the near or longer term. Let's shift now to take a closer look at our third quarter performance. First, the strong and early respiratory demand in Q3 was mainly driven by high COVID-19 prevalence throughout the United States. This will potentially be the first real flu season we see where COVID-19 rates immediately preceded, contributing to higher prioritization of our combo assays as disease stages converge. While the high COVID-19 rates were less pronounced than the 2022-2023 season, there is potential for a longer drop-off in overall season duration. If the timing in Australia translates to this hemisphere, the most aggressive growth in flu prevalence could occur early November, with peak prevalence sometime in early January. Both the overall market for respiratory testing and our respiratory business became significantly larger due to more testing in general and significant share gains from competitors for us specifically. We have a strong position in this market, and our respiratory diagnostic capabilities play an important role in combating both early and seasonal upticks of COVID-19, RSV, and influenza, among others. We're also well positioned to manage any seasonal fluctuations given our operations team's agility to respond to meet customer demand. We had strong, solid performance across all geographies in Q3, including China. This may be a surprise to some investors, but it isn't to us, and we remain bullish on our business there today and into the future. Joe will discuss geographic performance in detail, But I wanted to speak specifically about China given the numerous recent comments by healthcare CEOs during their recent earnings calls. Frankly, all companies in healthcare in China are not the same, and neither are all diagnostic companies with businesses in China. Quidel Ortho has challenges, of course, but our challenges are not the same as all others. Here are a few differences. Our business in China is largely clinical chemistry and uses dry slide technology. Our instruments are in medium volume stat labs, and when the Shanghai and Beijing lockdowns ended, the volumes returned quickly to normal levels, driven by people who are ill and in need of immediate care. This is a part of healthcare that is not as affected by the economy. Further, because of our dry slide technology, we have often not been subject to VBP tenders, and our pricing has been reasonably stable. Our immunoassay business in China is still small, relatively speaking. With respect to the often discussed and we VBP tender, only the infectious disease panel, hormones, and HCG are related to our business. there will be 23 provinces participating that represent in these immunoassay categories about two percent of our overall business in china assuming we participate in the tender and lower our prices at the rate that we saw in the 2021 bbp tender the impact would be a loss of 0.72 percent that's less than one percent of our business in china our opportunities far outweigh our risks. Anti-corruption has also been an often discussed topic. As I've said before, we are not seeing any impact thus far, and we continue to monitor the situation closely. For example, we are watching installation rates on instruments purchased to understand if this will create a few weeks lag in reagent ordering. But that's the extent of what we are expecting. In summary, our China business is fine. and is expected to be a growth driver for us moving forward. As I said, we're bullish. For Q4, we expect to be up 25% over the prior year quarter, and we expect continued growth in 2024. Shifting now to our four business units, our labs business unit delivered 3% year-over-year growth in non-respiratory revenue, with growth across all major geographic regions, including Asia Pacific, China, Europe, Middle East, and Africa, and North America, where we saw year-to-date placements increase 19% versus 2022, which is the leading indicator of our lab's business growth potential and durability. I'm also pleased to note that with increased manufacturing output, we have now worked through the majority of our lab's instrument backlog, returning to normalized levels and are primed to meet customer demand moving forward. The notable strength in clinical chemistry continues to be driven by a return to pre-pandemic utilization levels and the strong integrated instrument placements over the last few years. Additionally, our integrated installed base grew 12% and automation increased 14% year over year. continuing the positive trend that we've seen since implementing our commercial excellence program and launching our Vitros XT7600 integrated system, a trend that also portends well for our recurring labs revenue in the future. Finally, we reached a significant milestone with a 300 automation track system going live, further expanding our footprint and experience base through laboratory automation. Turning to our point of care business, in addition to its role in acute care settings, our point of care portfolio remains a cornerstone for managing a range of respiratory infections, such as flu, RSV, COVID-19, and strep A. And as I reflect on the COVID-19 pandemic, we played a critical role in the public response to contain the spread of this deadly virus. With the initial launch of the COVID-19 vaccine and subsequent booster shots over the last two years, there has been a shift away from asymptomatic testing and the necessity to produce a negative PCR test. However, the public has taken a greater responsibility for their individual health and understanding how viruses spread. We are seeing considerable volume from patients and influenza-like illness symptoms. turning to their medicine cabinet to self-administer our quick view at home over-the-counter COVID-19 test, or asking their doctor for a test in the clinic. Further strengthening our position as a leader in COVID-19 testing capabilities, I'm delighted to report that we received CLIA waiver in the U.S. for our new Sophia 2 SARS antigen plus FIA in September. This is the first rapid antigen test that detects COVID-19 to be awarded FDA market clearance through the agency's de novo process. This is also now the first rapid antigen test to receive a CLIA waiver. In addition to our CLIA waiver, we were honored to receive an award from the U.S. government to provide the government with at-home COVID-19 tests that will be provided for free to American households. The top line impact From this $29 million award commences in the fourth quarter and is expected to continue to over 18 months and was not included in our 2023 financial guidance. And while the award will not make a material impact on our financial results, we feel privileged to continue providing our COVID-19 test to the US government. We believe by doing so we're doing what we can to help the government be prepared for another pandemic level threat. COVID-19 has clearly moved into an endemic state. However, we expect it to remain a persistent respiratory pathogen for many years to come. Our testing capabilities allow patients and providers to be informed both quickly and accurately. Our transfusion medicine business met our expectations for the quarter and our immunohematology portfolio, which represents approximately 75% of the transfusion medicine business, grew 4%. And lastly, our molecular diagnostics business. I consider our R&D team diagnostic pioneers as they recognize the potential early on and the important role that syndromic panels can play in incorrectly detecting pathogens responsible for infections in the bloodstream, central nervous system, GI tract, and respiratory system. With public awareness of syndromic panels increasing and the rise of multiple circulating viruses, the need for fast, accurate, multiplexed syndromic testing solutions like Savannah is critical. Unique to Savannah are its rapid turnaround time, simple workflow, and test flexibility, allowing more clinically relevant information to be generated closer to the patient in a timeframe that can affect treatment. I am confident we will receive Savannah instrument clearance by the end of this year and launch commercially in the U.S. very quickly thereafter. We have instrument inventory and I expect that we will launch at pace. As we continue to innovate and significantly differentiate ourselves in the market, we are focused on developing those assays and panels that address unmet clinical needs. As an example, we have added syphilis to our SDI panel. Syphilis is one of the fastest growing STIs with a 74% increase in cases since 2017. And among those cases, newborns have surged with a 203% increase. The lack of sufficient diagnostic test methods for primary syphilis compounds this problem. And those numbers are likely underestimated because of this. Again, this is just one example of how diagnostic testing can provide unique solutions to help combat devastating but easily treatable bacterial infections. We expect several plan panels to be de novo and to be differentiated as well. While we continue to expand our suite of products and capabilities, we are steadfast on driving our next phase of integration. to create a highly efficient, agile organization rooted in operational experience. With nearly 18 months into becoming Quidel Ortho, we know more today than we did previously and are aggressively focused on reducing complexity in the business, enhancing our culture, improving capital allocation and portfolio management, and upgrading our global manufacturing operations and supply chain capabilities. These cost reductions also create room on our P&L so that we can increase our business development efforts and other growth investments. As I mentioned on our second quarter call, our work to capture the $130 million in cost synergies over three years is well underway, and it's worth repeating, is being done in lockstep with creating a long-term growth mindset and prioritizing initiatives that can help drive incremental growth, increase efficiency, and improve profitability. While other companies are concerned about inflation and FX headwinds, we believe our cost synergy efforts can more than offset these effects and ultimately result in EPS growth. Before I turn the call over to Joe, let me take a moment to thank our many stakeholders, from my brilliant colleagues who bring innovation to solving complex issues, to the patients and providers who put their trust in our products when accuracy matters most, to our investors who believe in our vision to advance diagnostics to power a healthier future for patients around the world. Pridel Ortho's proven ability to quickly meet the ever-changing needs of healthcare is what sets us apart. With that, let's turn the call over to Joe to review our financial performance and guidance to close out 2023. Joe.