QuidelOrtho Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 1, 2023

There are 10 speakers on the call.

Operator

Welcome 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.

Operator

I would now like to turn the call over to Juliet Cunningham, Vice President of Investor Relations, please go ahead.

Speaker 1

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 Buske, 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.

Speaker 1

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 ks 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 judgment and expectation as of today.

Speaker 1

Except as required by law, we undertake no obligation to 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 GAAP. Please see Slide 3 for a list of non GAAP measures.

Speaker 1

Reconciliations to these non GAAP measures to their most directly comparable GAAP 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, or given on a comparable constant currency basis. With that, I'd like to turn the call over to Doug Bryant.

Speaker 2

Thank you, Juliet. Good afternoon, everybody, and thank you for joining us today for our Q3 earnings call. Let me first take a moment to welcome Juliet to our Quidel Ortho team as we continue to execute on our strategy to increase shareholder value. Juliet's expertise in the medical technology sector and her 25 years of experiencing Our 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 And for those of you that have known me a long time, you recognize that I don't sound normal.

Speaker 2

Let me just Say that having suffered through this over the weekend, we are definitely in Straight season. And it didn't start in my house. And I know 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.

Speaker 2

Turning now to our Q3 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 3rd quarter revenue of $744,000,000 with adjusted EBITDA of $169,200,000 and adjusted EBITDA margin of 23%, which was up sequentially from Q2. During the Q3, we generated $53,000,000 in adjusted free cash flow, which is another testament to the strength of our business.

Speaker 2

This quarter, we paid down another $52,000,000 of our total company debt and year to date, we have paid down $175,000,000 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

Speaker 3

If you look at trends

Speaker 2

in the healthcare industry, they point to a greater need for diagnostic testing. Near patient care settings and RAPIDS results are more important now than ever before. Recent news around the adoption trends of new COVID-nineteen Vaccines and the use of GLP-one 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 and a higher number of COVID-nineteen cases and thus likely higher levels of testing.

Speaker 2

Nearly 82% of eligible Americans received at least 1 COVID-nineteen shot since the vaccine became available in late 2020. The U. S. Department of Health and Human Services reports that Only 7,000,000 Americans have opted to get the bivalent booster since mid September. While we hope for greater adoption among all eligible people.

Speaker 2

We also recognize that only 51% of eligible Americans received the 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-nineteen 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-one 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.

Speaker 2

2nd, these medications are presently not covered by private insurance or Medicare. With nearly 65,000,000 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-one is being administered, we could continue to play an important role on their care journey. Prior to prescribing any metabolic based medication, doctors may order our laboratory test establish a baseline and would continue to do this in 6 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.

Speaker 2

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 3rd quarter performance. First, the strong and early respiratory demand in Q3 was mainly driven by high COVID-nineteen prevalence throughout the United States. This will potentially be the 1st real flu season we see where COVID-nineteen rates immediately precede it, contributing to higher prioritization of our combo assay as disease stages converge. While the high COVID-nineteen rates were less pronounced than the 2022, 2023 season, there is potential for a longer drop off in overall season duration.

Speaker 2

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-nineteen, 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.

Speaker 2

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.

Speaker 2

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 DriSlide technology, we've often not been subject to and our pricing has been reasonably stable.

Speaker 2

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 2% 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 PV feet tender, The impact would be a loss of 0.72%, that's less than 1% of our business in China. Our opportunities far outweigh our risks.

Speaker 2

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 that 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.

Speaker 2

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 4 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 placements increased 19% versus 2022, which is the leading indicator of our lapsed 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 labs instrument backlog returning to normalized levels and are primed to meet customer demand moving forward.

Speaker 2

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 XT-seven thousand six hundred integrated system, a trend that also pretends 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 space 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-nineteen and Strep A.

Speaker 2

And as I reflect on the COVID-nineteen pandemic, we played a critical role in the public response to containing the spread of this deadly virus. With the initial launch of the COVID-nineteen vaccine and subsequent booster shots over the last few 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 QuickVue at home over the counter COVID-nineteen test or asking their doctor for a test in the clinic.

Speaker 2

Further strengthening our position as a leader in COVID-nineteen testing capabilities, I'm Delighted to report that we received CLIA waiver in the U. S. For our new SOPHIA-two SARS antigen plus FIA in September. This is the 1st rapid antigen test that detects COVID-nineteen to be awarded FDA market clearance through the agency's de novo process. This is also now the 1st rapid antigen test to receive a CLIA waiver.

Speaker 2

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-nineteen tests that will be provided for free to American households. The top line impact from this $29,000,000 award commences in the 4th quarter and is expected to continue 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-nineteen test to the U.

Speaker 2

S. Government. We believe by doing so, we're doing what we can to help the government be prepared for another pandemic level threat. COVID-nineteen has clearly moved into an endemic state. However, we expect it to remain a persistent respiratory pathogen for many years to come.

Speaker 2

Our testing capabilities allow patients and providers to be informed both quickly and accurately. Our transfusion medicine business met our for the quarter and our immuno and hematology portfolio, which represents approximately 75% of the transfusion medicine business Grew 4%. And lastly, our Molecular Diagnostics business. I consider our R and D team Diagnostic pioneers as they recognize the potential early on and the important role that syndromic panels can play and 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 multiplex syndromic testing solutions like Savanna is critical.

Speaker 2

Unique to Savanna 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 Savanna instrument clearance by the end of this year and launched commercially in the U. S. Very quickly thereafter. We have instrument inventory and I expect that we will launch As we continue to innovate and significantly differentiate ourselves in the market, we are focused on developing those assays and panels that address unmet 4% increase in cases since 2017 and among those cases newborns have surged with a 203% increase.

Speaker 2

The lack of sufficient diagnostic test methods for primary syphilis compounds this 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 planned panels to be de novo and to be differentiated as well. While we continue to expand our suite of products and 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 and L so that we can increase our business development efforts and other growth investments.

Speaker 2

As I mentioned on our Q2 call, our work to capture the $130,000,000 in cost synergies over 3 years is well underway And it's worth repeating, it's 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 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. PYdotal 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.

Speaker 2

Joe?

Speaker 3

Thanks, Seth, and good afternoon, everyone. Our top line performance in the 3rd quarter was positively impacted by strong and earlier than expected demand for our respiratory products in our key markets. So let's begin with details on our Q3 revenue on Slide 7 of the earnings presentation. And to assist with Comparisons, we've added quarterly non respiratory and respiratory revenue chart for 2022 and the 1st 3 quarters of 2023 on Non respiratory revenue was up 2% in constant currency to $559,000,000 in the 3rd quarter, driven by continued strength in our labs business which grew 3%. We are focused more on full year non respiratory and labs Growth rates and quarterly results, which smooths out quarterly variability tied to instrument placements.

Speaker 3

We have good visibility in this part of our business and are Confident of high single digit labs growth in Q4, which will translate to non respiratory revenue growth So they are in a full year guidance range. And note that there is some timing of instrument revenue between Q3 and Q4 It explains the disparity in growth rates for the glass business. But importantly, we are back to normalized instrument backlog levels in Q4. We have a strong order book and are actively winning contracts and we believe our Labs business is well positioned to Adorable growth in both the near and longer term. Respiratory revenue came in strong at 185,000,000 which reflects earlier than expected demand for COVID-nineteen, flu, strep and RSV tests.

Speaker 3

In addition to normal pre respiratory season distributor stocking orders, we saw greater demand in sell through in Q3. Compared to prior year period, respiratory revenue was down 21%, primarily due to the anticipated decline in COVID-nineteen revenue. Now looking at our quarterly performance by geography on a constant currency basis and excluding Respiratory revenue, we saw solid performance across the regions with instruments and labs showing strength in most regions. North America revenue declined 1%, EMEA grew 3%, China grew 6% and our other region, which includes Latin America, Japan and other Asia Pac markets grew 7%. North America, which is our largest geography by revenue, declined, as I said, 1% compared to the prior year period.

Speaker 3

However, if you exclude COVID-nineteen revenue only North America actually grew 10% and delivered solid revenue in the last business. In EMEA, non respiratory revenue increased 3% with strong performance in transfusion medicine. And as Doug said earlier, our China region achieved strong 3rd quarter results of 6% growth. We of course will continue to monitor the situation closely and we expect that our China business excluding respiratory will grow in the high teens for the full year 2023. Now turning to our Q3 financial performance below the revenue line compared to the prior year period and turning to Slide 8 in the deck.

Speaker 3

Adjusted gross profit was $376,000,000 or 50.5 percent gross margin, a 490 basis point improvement sequentially. Gross margin was driven by Sofia in North America, primarily COVID-nineteen flu combo test, strep and RSV. Moving down the P and L, SG and A expenses were $194,000,000 a decrease of $10,000,000 compared to the prior year period as we continue And on a sequential basis, SG and A expense increased by $15,000,000 due to variable expense accruals related to higher sales and integration costs. We expect SG and A expense in Q4 to be more in line with what we saw in our Q2. R and D expense was $62,000,000 a decrease of $3,000,000 year over year, reflecting our continued Net interest expense for the period was $38,000,000 an increase of $8,000,000 versus the prior year period as expected.

Speaker 3

And during the Q3, adjusted EBITDA was $169,000,000 or 23 percent adjusted EBITDA margin to 600 basis points higher than Q2, driven by higher North American sales and expense management. Compared to the prior year period, adjusted EBITDA declined by $58,000,000 due to the previously referenced anticipated decline in COVID-nineteen revenue. Our adjusted earnings per fully diluted share for the Q3 was $0.90 compared to $1.85 in the Q3 of 2022. The year over year decrease was driven by the exceptionally strong COVID-nineteen revenue in the prior year. Adjusted diluted EPS increased by $0.64 sequentially, which is stronger than expected due to higher total revenue.

Speaker 3

Now moving to the balance sheet On slide 9, we ended the Q3 with cash, cash equivalents and marketable securities of $205,000,000 and total debt of 2,500,000,000 CapEx during the quarter was $33,000,000 and adjusted free cash flow was $53,000,000 which was positive and reinforces our view on the full year 2023 adjusted free cash flow guidance. In terms of capital allocation, deleveraging remains a top Priority with our goal to be at or below 2x net debt leverage by the end of 2024. Towards that end, we have paid down 100 and $5,000,000 year to date with $52,000,000 paid down during the Q3. Our current net debt ratio is 3 times and we continue to expect our net debt to be approximately 2.5 times by year end. And while we did not buy back any shares in the Q3, we continue to maintain a balanced approach here.

Speaker 3

That is given the recent stock movement, we look to be opportunistic in sharing purchases while also continuing to prioritize our debt reduction. Now turning to our fiscal year 2023 guidance on Slide 10, first I would like to provide some broader context As part of our business combination, we have identified cost synergies of $130,000,000 that we expect to realize We are making steady progress across the organization, improving the efficiency of our business, paying down debt, generating cash, While maintaining flexibility for smaller tuck in M and A opportunities, we're laying the necessary groundwork for our transformation to a organization that's focused on long term top Our Q3 financial performance, which exceeded our plan, Significantly derisks Q4. And while we can't precisely predict the timing of the respiratory season in advance, We believe it's prudent to plan for a normal or typical season. In addition, we have visibility into our non respiratory business. And again, we expect our lab business to grow high single digits in Q4.

Speaker 3

All in all, we are very confident that we can end the year strong. Toward that and moving to Slide 10, we are reiterating our full year financial guidance as follows. We expect full year 2020 3 total revenue of $2,880,000,000 to $3,080,000,000 with Non respiratory revenue growth of 5% to 6.5% on a constant currency basis to $2,270,000,000 to 2,310,000,000 We expect respiratory revenue to be at the upper end of our range of $610,000,000 to $775,000,000 For Q4 and going forward, we will be including COVID-nineteen revenue as part of our overall respiratory business now that it's in an endemic state. Gross margins to be in the low 50s based on product mix, including higher instrument revenues on the open labs And ship orders as we satisfy back orders. Adjusted EBITDA of $800,000,000 to $830,000,000 or 27% to 28% adjusted EBITDA margin and adjusted diluted EPS in the range of $4.85 to $5.30 Now as a reminder, our 2023 financial guidance includes the Following key assumptions, at current rates, currency translation is expected to be about neutral to full year sales and adjusted EBITDA with some higher FX impact on non respiratory revenue.

Speaker 3

Net interest expense continues to be expected to be in the range of $145,000,000 to 150,000,000 And as discussed last quarter, we expect adjusted free cash flow to be at the low end of the 50% to 65% range of adjusted EBITDA as we appropriately invest in our manufacturing capacity to meet customer demand. By the way, this translates into more than 100% of adjusted net income. Full year diluted weighted average share count is 67,300,000. And with that, I will now turn the call back over to Doug for his closing comments.

Speaker 4

Thanks, Joe. I'd like

Speaker 2

to leave you with one key takeaway and that's we are the same successful respiratory company that we were prior to the global pandemic and the acquisition of Ortho Clinical Diagnostics. The key difference is that the overall respiratory market including COVID-nineteen now in its current pandemic state is significantly larger than it was pre pandemic. And quite a lot of the physician in the overall diagnostics market, including respiratory, is much stronger as a combined company than either company was on a standalone basis.

Speaker 3

Contrary to some recent opinions,

Speaker 2

we believe as evidenced by our results, The market, the diagnostics market is positioned for continued durable growth for many years to come.

Speaker 4

And with that,

Speaker 2

I'll ask the operator to open up the line for questions.

Operator

Thank you. We will now begin the Q and A session. Our first question is from Andrew Brackmann with William Blair. Your line is now open.

Speaker 5

Yes. Hi. This is Dustin on the line for Andrew. Thanks for taking our questions. As we look forward to 2024, just wondering if you can touch on some of the building blocks for revenue and margins.

Speaker 5

Understanding it's a bit early here, but a lot of investors are asking about the moving parts. So Any color there would be greatly appreciated.

Speaker 2

Yes. I'll let Joe go through some more detail. But clearly, The fact that we've stabilized the Labs business is very helpful to growth. We expect it to continue to do well in respiratory and of course We'll be launching Savanna. So I would look as an investor to those three milestones.

Speaker 2

Joe, what would you add?

Speaker 3

Yes. I was just going to add that We still expect the growth and the margins will be aligned with the LRP we communicated about a year ago At Investor Day, so there's really no change there. And as Doug said, we have a lot of confidence in the lab business. And as I said in the prepared remarks, we have visibility into that non respiratory business. Now as you think about sort of the more variable pieces And sort of more of the building blocks that we still have to work through between now Out in early next year when we provide 24 guidance, it's the timing of the respiratory season for Q1.

Speaker 3

It's the launch of Savanna. It's the endemic COVID levels and where that finally ends up at the end of this year. It's a synergy achievement and then of course there's inflation and FX to think about also. So those are all the big moving pieces.

Speaker 5

Understood. Thanks for the insight there. Another question on Savanna, good update on the approval time line there. Just Maybe if you could talk about your confidence in the rapid menu expansion and then placement install expectations? And then maybe to ask it another way, What are kind of the KPIs that you're going to be looking at to determine if Savanna is a successful launch?

Speaker 5

Thank you.

Speaker 2

We're in good shape from a menu development perspective and the clinical trials will drive Our success. So we will do several clinical trials throughout 2024 With an expectation that once the instrument has already been cleared that the packages should be Somewhat straightforward on each of the panels that we'll do. So we've said before that we will attempt to be in market with at least 4 or 5 different panels before the end of 2024 and that would be our major objective. We have instruments in inventory. We've recently completed the software update.

Speaker 2

We are fully manufacturing cartridges. And so I don't see any other constraint other than U. S. FDA clearance. And obviously, we will work with the regions to launch the Savanna products internationally as well, but obviously we have pretty high expectations for here in the U.

Speaker 2

S.

Operator

Our next question is from Patrick Donnelly with Citi. Your line is now open.

Speaker 6

Hey, guys. Thanks for taking the questions. Maybe the first

Speaker 2

one for Joe. I've got

Speaker 6

a few questions. Hey, Doug, how are you? I've gotten a few questions just on the 4Q ramp. The revenue, I think sequentially is about flat. I think EBITDA It's about double 3Q.

Speaker 6

So can you just talk about what the moving parts are there? Obviously, the respiratory pieces is, I assume, a big piece. But Can you just talk about that ramp and the confidence level in the EBITDA margin, EBITDA dollar ramp there in 4Q?

Speaker 3

Yes. Hey, Patrick. So first of all, again, we as I said on the call probably a couple of times, we got good visibility into the non respiratory business and we expect Yes, a pretty solid Q4 for the Labs business. Of course, the growth, As you think sequentially, it's going to be driven predominantly by the respiratory business. And so if you think about Where we are in Q3, with $185,000,000 of respiratory revenue in Q3, The remaining guide, again, is to get us to what we've been calling this normal or typical flu season.

Speaker 3

And so to get to the high end of the range that for respiratory revenue that I talked about in the prepared remarks, You're looking to increase roughly $50,000,000 from Q3 to Q4. And given What we know about the respiratory seasons, that doesn't sound super insurmountable. And by the way, if that happens, We would be

Speaker 2

down about

Speaker 3

$115,000,000 or 33 percent from the prior year Q4 respiratory revenue. So clearly, we're not planning for A record respiratory season like last year. We're planning towards this normal or typical season.

Speaker 2

Yes. And maybe Joe, I could add just a little bit more color. Typically what has happened over the last I've been watching this now for 14 years. Particularly driven by U. S, the distributors will order product In Q3, historically it's actually been close to when kids go back to school.

Speaker 2

So they've ordered and you can see right now in our own inventories at Which we have very good visibility to. You see fairly high inventory levels and what would normally happen is as we respiratory season emerge, the tests are going to come out of that inventory. And depending on how quickly that inventory bleeds down, We'll determine what the distributors, the major distributors will order before the end of Q4. Sometimes we've been holding our breath to the last week of the year, Sometimes, but typically it happens in the last 3 weeks. So that's what happens Pretty much every year.

Speaker 2

Obviously, COVID changed that dynamic a little bit, but that's typically what happens. And Right now looking at what the ILI rates are and the fact that I'm hearing that a lot of physicians are actually ordering the combo product, I think it's reasonable to expect that we have a bleed off that mimics what we've seen in prior years. And So we won't see a lot of ordering, for example, in October, we didn't, but we will be expecting that once Distribution inventory levels are down below a certain point. It will trigger them to order. And the speed with which they got there Sometimes affects how much they order as well.

Speaker 6

Okay. That's helpful. And just Joe, on the marginEBITDA The dollar ramp, is that almost all tied to respiratory? That's a pretty big step up as well. I just want to make sure we're thinking about the margin profile correctly 3Q to 4Q.

Speaker 3

Yes. It's driven by 2 things, Patrick. It is the respiratory revenue step up, which as you know, the respiratory products carry highest standard gross margins of all of our products as well as discontinued expense management synergy achievement. Those 2 things are going to drive the increase in gross and EBITDA margin.

Speaker 6

Okay, understood. Thank you. And then maybe just on the non respiratory piece, the lab business. Doug, can you maybe just talk about the trends you saw in the quarter, the visibility here going forward in terms of the growth, just trying to balance Expectations into 4Q and as we work our way into 2024, just what you're seeing there and expectations would be helpful.

Speaker 2

Well, just generally, as I stated, the orders are up. So really what drives the growth rate after that is the Speed with which we get the installs done and the customer up to test of record. But we do expect a tick up in Q4 on the Labs And frankly, this is maybe a little bit too much detail, but every Friday, I see exactly what we closed. And I have seen a ramp up in terms of the order rates. So that's my visibility to it.

Speaker 6

Okay. That's helpful. I appreciate it, guys.

Speaker 3

Sure.

Operator

Thank you, Patrick. Our next question is from Alex Nowak with Craig Hallum. Your line is now open.

Speaker 4

Hey, good afternoon everyone. That actually just staying on the last topic there, the Labs business ramp in Q4, is there any geography in that's driving the outsized growth? Is it China perhaps? Obviously, a lot of focus there. Just what's your thoughts?

Speaker 2

Yes. As I mentioned, we will be up around 25% in China alone. And for the year, I think we're high teens in terms of growth Yes. 2023. So China clearly is back on track.

Speaker 2

It is a growth driver for us. And of course, the other Major driver is the U. S. What happens in the U. S.

Speaker 2

Because of the size is particularly important. So what we're seeing and expecting to see in Q4 It's driven by China and by the U. S.

Speaker 4

Okay, got it. That's helpful. But I'll turn it over to Yes, go ahead, Joe.

Speaker 3

Alex, I'm sorry. I was just going to add that. Most of the regions are going to be up sequentially, Q3 and Q4. But the year over year growth, as Doug said, there's a lot of it has to do with China and the lockdowns we saw last year, obviously lifted.

Speaker 4

Okay, got it. Thank you. And then so on Savanna, what has been the feedback so far at the FDA? And I'm sure they've had questions around the submission and I've honestly forgotten. Is this going to be a 510 or an EUA that we should get the approval at the end of this year?

Speaker 2

Ricard, thanks for the question, Alex. We're super confident that we'll have approval for the box And it will be approved 510. We'll pursue CLIA waiver at our earliest But it's not going to be in EUA.

Speaker 4

And that's 510 for the RVP-four as well, just to confirm?

Speaker 2

That's correct. So RVP-four would be cleared. HSV Obviously, it's under active review as well.

Speaker 4

Okay, perfect. And then just an update on the high volume cartridge manufacturing line. Thank you.

Speaker 2

I don't have a further update. We're still targeting everything on track for midyear next year.

Speaker 4

Excellent. Good to hear. Thank you.

Speaker 2

Thanks, Alex.

Operator

Our next question is from Jack Meehan with Nephron Research. Your line is now open.

Speaker 7

Thank you. Good afternoon. First, I hope you feel better soon. Wanted to follow-up on some of the Q4 guidance questions. Maybe just looking at the margin profile in the 4th quarter, I think the guide implies something like a 40% EBITDA margin.

Speaker 7

If I just look at the history of the company, it's somewhat Unprecedented outside of the COVID period. So I think I heard SG and A was maybe more like 2Q. Are there other factors you call out?

Speaker 2

I'm super happy that you asked that question, Jack, because no, we're not going to do 40% EBITDA in the 4th quarter.

Speaker 3

Yes, Jack. There must be a disconnect somewhere because, yes, it should be more like mid-30s. It would not be and that's pretty much I think last Q4, we were 32%, 33%. So it shouldn't be a size 40.

Speaker 8

Okay. I'll

Speaker 7

have to play with the model. But even getting To a mid-30s EBITDA margin, still pretty healthy kind of relative to the pro form If you put together the 2 companies historically, just talk about going from 23% in the 3rd quarter To that level, what drives the step up?

Speaker 3

As I said before, It's the increase in respiratory revenue, which carries high margins and then expense management. I said on the prepared remarks that the we expect the SG and A in Q4 to come down to closer to where it was in Q2 levels. So we're expecting a drop down in expense.

Speaker 2

Yes. And maybe this would be a good time to comment on this. We've talked Before with everybody on the phone about the idea that we started with harmonization, we went to integration, we had 2 shots I'm going with cost synergies, projects that we call Synergy 1.02.0. And some of those things are Finally showing up in the Q4. So that's a factor.

Speaker 2

But Jack after only 18 months As a combined company, we know what needs to be done. We understand the levers we need to pull. And we're in the process of identifying the initiatives that we will need in order to Moving forward. At the end of the day, we can run this business better and we expect to run this business better, Which will result in EPS growth over time. And I think you're seeing the beginning of it in the Q4 and I would expect us to be able to report to you our expectations for the efficiencies that we will gain moving forward.

Speaker 2

But I can't emphasize this Enough. We know what needs to be done.

Speaker 7

Okay. And then appreciate all the comments on the China VBP. I was just curious if you could clarify, do you plan to participate in this program at all? And do you think in future test categories, how important is it for you to maybe get exempt From the program?

Speaker 2

Yes. So there's two sides to it. You've had other VVPs that have included clinical chemistry and some of those have excluded Our products because they're dry slide chemistry. And 1 a couple of years ago, I don't have all the details In front of me, but we chose to participate. We did reduce price and we actually increased volume pretty dramatically.

Speaker 2

I think my Colleagues in the diagnostic industry look at it the same. While it is a threat to price, sometimes it gives you greater access to the volume that's out there that we might not ordinarily have had access so easily. So in that case, 2 years ago, ortho actually was the winner And did pick up the volume. So we will try to participate in this tender, but it really is only hormones, infectious disease tests and HCG, which are pretty low volumes for us. If we do choose to participate, we will more than likely reduce our pricing as was done in 2021 About that same level, pretty draconian, but it could be valuable to us in order to retain our volume.

Speaker 2

If that's the case, you heard me in my prepared remarks say that that's 0.0 or 0 point 72% impact if we were to reduce pricing at that level. But that would be the worst case scenario Because you have to remember that we're going through distribution and distribution will pick up part of that price. So yes, we are going to participate if we can. Of course, we would. And That would be the impact if we didn't pick up any volume, But simply retained what we had.

Speaker 7

Okay. Got it. And Just last question, the account for maybe for Joe, the accounts receivable stepped up, I think $85,000,000 sequentially. What drove that?

Speaker 3

The higher respiratory revenue in the quarter. And by the way, we our global DSO, Jack, is 33 days And it's, I believe it's 20 or less from the U. S. So all that respiratory revenue overachieving was in the U. S.

Speaker 3

So we've Already collected all that cash. So yes, that's what drove it up and we got very, very solid

Speaker 7

Thank you.

Speaker 3

Yes. Thank you.

Speaker 2

Thanks, Jack.

Operator

Our next question is from Andrew Cooper with Raymond James. Your line is now open.

Speaker 9

Hey guys, thanks for the questions. Maybe just sticking with the Labs business a little bit. Can you give us a little bit more color just on sort of what Seasonality is here and how we should be thinking about, one, what that meant for 3Q, but also when we think about that 4Q, I look at it and see a relatively easy comp. We have the backlog of instruments back to normal, which should be a tailwind here. So is there a scenario where this could be faster than the high single digits you pointed to in 4Q?

Speaker 9

And if not, maybe what might be limiting that relative to some of the tailwinds that we think about in the space?

Speaker 3

And Andrew, you're specifically talking about the labs business? Correct. Or non respiratory, right? Yes, Yes. I mean, I do think there again, we've got great visibility into this business.

Speaker 3

So let's just start

Speaker 2

with the timing part of the question if you want. So coming out of Q3, which is Typically the lower in terms of instrument orders. Q4 not only is higher Decisions made before year end, but often if they're sale instruments, we would see them higher in the Q4. So I'll start with that. I mean that's what's driving some of it.

Speaker 2

And then the question that Andrew I think is really trying to get at Is there potential upside there? And I would say, yes, but we have to deliver. We have to And we have to get installs. We got to make sure that we've got everything covered on the supply chain side and Everything has to go pretty darn well to be a lot better than what we're forecasting. How do you feel about that?

Speaker 3

I'll leave it at that. But I'll comment further on the

Speaker 2

What they're witnessing is just the optimism of the CEO and the conservatism of the CFO.

Speaker 3

Yes. But I will comment further on the seasonality of the lab instrument revenue. And I think it's Probably a good point to hammer on. If you look at the 5 year average of that legacy ortho business, Q1 and Q3 are typically The lowest instrument revenue quarters and the 5 year average is about 22% to 24% of the instrument revenue in those quarters. And in Q2 and Q4 are the highest revenue quarters for lab instruments at 26% to 28% of the annual instrument revenue.

Speaker 3

So We will see an uptick sequentially from Q3 to Q4 on last insured revenue, yes. That I can say with a lot of confidence.

Speaker 9

Okay, helpful. And then you mentioned capital deployment and not necessarily We're doing any buybacks as of yet. As we continue to see the stock price sort of come down, rates remain kind of steady, how do we think about That decision making process and where that threshold is to get a little bit more aggressive on the buyback as opposed to prioritizing debt pay down as you have so far?

Speaker 2

Well, we've said it before in terms of capital allocation that we look both at debt Repayment as well as share repurchase and when we do the math right now, obviously, the math would tell you that It's probably better to be buying shares than paying down debt, but it's not dramatically so. But we'll continue to be opportunistic for sure.

Speaker 9

Okay. I will stop there then. Thanks for the questions.

Speaker 2

Thanks, Andrew.

Operator

Our next question is from John Sauerbier with UBS. Your line is now open.

Speaker 8

Hi. Thanks for taking the questions. I was wondering if there's any additional color you could provide on the Savanna backlog. And then maybe more broadly on Molecular Diagnostics, just Any updates on the shift you're seeing there from centralized labs to decentralized solutions? And then how should we think about Savanna offsetting this in 2024?

Speaker 2

You are right that the play there for Savanna is to meet the need Bringing molecular testing closer to the patient. And so we would see that as an unmet need that has Existing for some time and has been addressed in part by other companies. We happen to think our solution given its speed and the ease of use And the comments that we're getting from potential customers, we think that we will be successful. But I will say that if we weren't successful somebody else in the space Would be. Molecular testing needs to be closer to the patient.

Speaker 2

That need has been in there for a while. We're simply trying to do it And address it in a better way. But if we didn't get it done, if you're looking for what the trend is, the trend is going to be that It's going to be decentralized for sure. And I didn't understand, John, your question On the backlog of Savanna, we do have inventory. We do have inventory that we built in anticipation of the launch in early 2024.

Speaker 2

Frankly speaking, we would have loved to have shipped a lot more boxes in Q4, But we're not cleared yet. So but again, I'm confident that we will be and we will be ready to launch.

Speaker 8

Got it. Appreciate that. And then maybe just a follow-up on the VITROS platform. I just want to make sure I understand here, but have you seen any Or change in the actual sales cycle there throughout the year?

Speaker 2

No, I'd say not. No. I don't think we've seen any significant macro changes in terms of Capital availability or decisions delayed. No, it's been a fairly steady For a couple of years now.

Speaker 3

Globally, we still average roughly fifty-fifty between cash deals and

Speaker 2

Right. And but the speed with which orders are coming, I don't see the customer behaving differently in terms of making decisions differently. And we do seem to be winning A few more than we normally would at this stage, but I don't see anything macro, John, that would impact clinical chemistry and or Immunoassay sales.

Speaker 8

Got it. Thanks for taking the questions.

Operator

There are no further questions at this time. So I'll pass the call back to the management team for any closing remarks.

Speaker 2

I'll just say on behalf of the team, thanks for your interest. Thanks for joining the call. We'll talk soon.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

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Key Takeaways

  • We delivered Q3 revenue of $744 million with adjusted EBITDA of $169.2 million (23% margin), generated $53 million in free cash flow and paid down $52 million of debt in the quarter to strengthen our balance sheet.
  • Our respiratory business benefited from an earlier than expected season, driving strong demand for our COVID-19, flu, RSV and combo assays, resulting in significant share gains and solid positioning across geographies.
  • The labs segment grew non-respiratory revenues by 3% YoY, cleared the majority of its instrument backlog, achieved 19% year-over-year instrument placements and expanded automation, including a 300-module track system milestone.
  • We expect FDA 510(k) clearance for our Savanna molecular platform by year-end and plan a rapid commercial launch in early 2024 with multiple multiplex syndromic panels to meet decentralized testing needs.
  • Our China business grew 6% in Q3, driven by clinical chemistry dry-slide technology in stat labs, and faces less than 1% revenue risk from the latest VBP tender, making it a key growth driver moving forward.
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Earnings Conference Call
QuidelOrtho Q3 2023
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