QuidelOrtho Corp Q2 FY2022 Earnings Call

Welcome to the QuidelOrtho’s Second Quarter 2022 Financial Results Conference Call and Webcast. At this time, all participants' lines are in a listen-only mode. 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 the call. I would now like to turn the call over to Bryan Brokmeier, Vice President of Investor Relations. Please proceed.

Thank you, operator. Good afternoon everyone, and welcome to QuidelOrtho’s second quarter financial results conference call. With me today to discuss our financial results are Douglas Bryant, QuidelOrtho’s Chairman and CEO; and Joe Busky, QuidelOrtho’s Chief Financial Officer. This conference call is being simultaneously webcast on the investors section of our website and a version of today’s presentation can be downloaded there. Before we begin, I will cover our safe harbor statement. Some of the statements we will make during this 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 for 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 in the joint proxy statement prospectus and our quarterly report on Form 10-Q that we plan to file tomorrow and our other filings 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 filed will be realized. Furthermore, this conference call contains time-sensitive information that’s accurate only as of today. Except as required by law, we undertake no obligation to update any forward-looking statement or time-sensitive information to reflect future events, developments, changed circumstances, or for any other reason. Also during today’s call, to facilitate a comparison of the company’s operating performance in the second quarter of 2021 to the second quarter of 2022, we will be discussing supplemental second quarter 2022 and 2021 revenues and adjusted operating results as Quidel and Ortho have been combined for the specific period. We will refer to this information as our supplemental combined information. This supplemental combined information, as well as certain other items we will discuss, do not conform to U.S. Generally Accepted Accounting Principles, or GAAP. Please see slide three for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the appendix of the investor presentation and press release issued this afternoon, both of which are available in the investor relations page of QuidelOrtho website. 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 Douglas Bryant, QuidelOrtho’s Chairman and CEO. Doug?

Thank you, Bryan. Good afternoon everyone as Quidel and Ortho have combined to become QuidelOrtho. This is our first call as a combined company. Thanks for joining us. I sincerely appreciate your time and your interest in our company. For those of you who were either shareholders of the Ortho business or are entirely new to our story, I joined QuidelOrtho from the Quidel Business where I was President and CEO for more than 13 years. Along with Bryan joining me on this afternoon’s call, we have Chief Financial Officer Joseph Busky. Both Joe and Bryan joined us from the Ortho Clinical Diagnostics business. I’m happy to have them joining me on this afternoon’s call. Beginning with our results, we delivered strong performance highlighted by 37.5% supplemental combined revenue growth, 32% supplemental combined adjusted EBITDA margin, and triple-digit supplemental combined adjusted EPS growth, as the newly formed team did a terrific job executing on our strategic priorities. Excluding COVID, supplemental combined revenue grew 9% year-over-year. I am very pleased with the way both of our organizations have engaged with each other and integrated in a short amount of time. We had strong execution across the QuidelOrtho businesses as our commercial, R&D, and operations teams maintained their focus on both near-term and longer-term growth opportunities. Supplemental combined revenue for the second quarter, including both Quidel and Ortho for the full quarter, reached $898.5 million supported by double-digit growth in point-of-care and molecular diagnostics, along with solid high single-digit combined growth for labs and transfusion medicine. As we review our notable achievements in the quarter, I’d like to introduce our five strategic priorities, which are one, integration and corporate culture; two, product innovation; three, global commercial excellence; four, operational excellence; and five, capital deployment. I’ll start with the integration and our culture. The integration of the two organizations is our top priority. As I emphasized on prior calls, we started on the pre-integration work almost immediately following the announcement of the signing of the business combination agreement in late December, enabling us to hit the ground running with the integration immediately after we completed the transaction at the end of May. As we work through the integration, we are focused on maintaining business as usual, keeping our unrelenting focus on our employees and commercial excellence while preserving the best attributes of both cultures as we define our company going forward. We made substantial progress since the transaction closed on May 27. We’ve achieved over 240 critical integration milestones, identified over 100 integration projects, and are executing on over two dozen functional and cross-functional work streams. We announced my leadership team, as well as other senior executives, developed business unit structures, announced regional leaders and established systems integration roadmaps. We appointed a strong integration leader who has focused on cultural alignment, combining our operating models, and monitoring plans for our specific G&A synergy targets. To minimize customer disruption and maintain our industry order service levels, regional commercial leaders were announced soon after we closed, and we are organizing the joint commercial efforts as quickly as possible, beginning with a U.S. lead-sharing program that is expected to accelerate cross-sales. Through this process, we are finding that the two organizations balance each other quite well. Quidel has proven to be agile and innovative, allowing it to take advantage of market opportunities to grow rapidly. Ortho, on the other hand, with its long history in the diagnostics market, has established a global infrastructure and processes that enable its stable 93% recurring revenue. That balance of agility and stability is critical as we plan to drive market share gains by responding to the needs of the market more quickly. We expect the commercial momentum to continue beyond that timeframe. While our integration is still in the early days, the pieces are aligning, and the chemistry is even better than expected, which is remarkable given our high expectations. With this progress in mind, our leadership team is even more excited now than when we first announced the deal. Moving on to product innovation. In addition to executing against our integration plans, our team is working to further advance our product pipeline. We will continue to make significant investments in R&D to advance Savanna, our new molecular multiplexing platform, while supporting continued expansion of both our Sofia and Beatrice test menus across the board. We’ve made good progress on the approximately 100 R&D projects we currently have underway. Long term, we plan to continue to invest in R&D to develop and broaden our portfolio, which we will leverage to accelerate worldwide market penetration. As Chairman, early on, I made the decision to establish the science and technology board committee to oversee and advise management on innovation, new product development, and strategic R&D goals and objectives, which I think is critical at this point in time. Led by our lead independent director Dr. Kenneth Buechler, the co-founder of Biosite and the creative genius behind the development of the Triage product line, the members of this committee have incredible expertise that we will leverage. Next, while I won’t talk about all the projects on this call, I can provide you with a few updates on some of our key growth drivers. Starting with our point-of-care business unit, we are driving progress on Sofia, which has come a long way in a few short years. Since the pandemic began, we grew the Sofia installed base by approximately 90% to 80,000 instruments. The vast majority of this installed base remained active, and most of the instruments replaced during the pandemic included signed three-year contracts to remind COVID, flu, strep, and RSV tests. This is driving strong growth for all these assays. Joe will expand further, but our non-COVID revenue per analyzer is up significantly over the last year, which justifies the many R&D projects underway to further expand our Sofia test menu. Our commercial team is focused on driving menu pull-through on Sofia and supporting incremental per-unit revenue growth. Importantly, our significant leadership position in the fluid testing market has translated into significant demand for our ABC combo test that tests for both flu A and flu B as well as COVID-19. We’re also excited about our progress toward delivering the first high-sensitivity cardiac troponin solution for the point-of-care market. Due to the pandemic, that clinical validation has taken longer than originally planned. Our 18 clinical sites are continuing to enroll subjects with the expectation of meeting the FDA performance criteria later next year. We expect the 510-K submission will follow shortly after the completion of the clinical validation, and we’ll utilize the combined cardiac expertise of both Quidel and Ortho. We expect that the review and subsequent clearance will occur in the normal timeframe, but there is no guarantee that the effects of the pandemic and EUA filings will have resolved by the time of the submission. We are selling in Europe and intend to increase the rollout. Once launched in the U.S., we are confident that our current customer base will readily adopt the new assay. More broadly, our integration work has uncovered greater potential cross-selling opportunities for Triage through our global sales team than initially anticipated in our synergy planning. In our labs business unit, we launched seven new assets globally in the quarter. Most notable was the U.S. launch of hemoglobin A1c, which has seen very strong demand and significant opportunities in our sales funnel. We expect to launch in the U.S. in the second half of this year. Additionally, we have continued to support several studies with our COVID IgG quant assay demonstrating the correlation of our assay and neutralizing antibodies, as well as a larger CDC study focused on population antibody levels and breakthrough infections. We believe these studies could better our understanding of immunity and may help inform public health recommendations related to COVID vaccination and precautions in the future. Turning to transfusion medicine, we’re seeing strong growth following the completed refreshment of our transfusion medicine portfolio last year. We are pleased to announce that QuidelOrtho reached a major milestone in vision placements by surpassing 5,000 installations globally during the quarter. This milestone is a testament to our technology service and thought leadership in transfusion medicine. We are dedicated to providing best-in-class technology and solutions in this area. Lastly, in molecular diagnostics, we continue to march forward to secure global regulatory clearances for our Savanna molecular multiplexing platform. Our limited European launch of Savanna with RBP4 continues to go well with some early wins. As manufacturing capacity ramps, we plan a full European launch in Q4 followed by 2023 menu expansions. Stateside, we completed the Savanna 510-K submission with RBP4 in May and continue to make progress toward the 510-K submission expected this year. We expect that submission will be followed by 510-K submissions for four additional panels in 2023. Looking at global commercial excellence, our third strategic priority. We’re firing on all cylinders to advance commercial excellence across multiple channels. With a relentless focus on base business execution, we are exceeding our revenue synergy targets at this time. We’ve kicked off cross-selling of our combined product portfolio through our global commercial teams with a fresh prioritization of both U.S. opportunities crystallized through our expanded commercial team. Specifically, we have initiated go-to-market programs in both the U.S. and China to reflect the new combined capabilities. Overall, our commercial integration efforts are accelerating our near-term value creation by identifying quick land opportunities by country and region, and ways to make the best use of our in-market organizations along with existing distributors. As such, we believe we are on track to deliver our 2023 revenue synergy target. Implementation of Ortho’s commercial excellence program across our entire QuidelOrtho organization is well underway. We track multiple key performance metrics to enable us to deliver our product promises and a customer experience that is second to none. The results we see are compelling. We’re driving market penetration of our integrated clinical lab instruments and enabling the pull-through of recurring revenue. In the process, our lab business has gone from low single-digit to mid-single-digit growth in a quarter. Our in vitro integrated analyzer installed base grew by 12% year-over-year, including double-digit growth in Europe, the Middle East, and Africa, China, and our other U.S. regions, and high single-digit growth in North America. Customer-centered service and follow-through are key components of our commercial excellence strategy and has been central to the QuidelOrtho and Ortho cultures long before the combination. Our ability to provide quality and customer service is critically important value across our customer base. To this end, I am pleased to announce that last week, we were ranked first for the seventh consecutive time in the service track clinical laboratory survey for integrated systems, which includes the top ranking in customer service and overall system performance. We were also recognized as number one in overall service performance for chemistry and amino acid systems. Importantly, as part of the ranking, service track records a net promoter score for each of the vendors; QuidelOrtho’s score was 20 points higher than our next closest competitor, highlighting that this is a first-class service organization, which, along with lengthy mean time between service calls of our VITROS analyzers, is a competitive advantage which portends well for QuidelOrtho’s growth in this category. In terms of the OTC trade, we continue to strengthen our positioning to our QuickView at-home OTC COVID-19 test. During the first two years of the pandemic, we scaled our U.S.-based manufacturing capacity exponentially. And now we have the automated production lines and trained personnel to produce millions of QuickView at-home tests a month on the low end and ramp weekly output to tens of millions of tests in a matter of months. While we have adjusted our capacity and contingent employees to support softer demand that began in the first quarter, we have maintained capacity as part of our warm base manufacturing initiative and recently began to ramp up production, giving us the ability to respond to the demands of our customers, and the U.S. government as cases changed. We have the relationships in place with retailers, so that if these new variants become more prevalent, we expect to have competitive shelf space. We’re currently working with CVS, Walgreens, Amazon, and other major retail distributors on ways to expand our availability and are excited that QuickView recently became available via Amazon Prime. We also sell through over 5,000 independent pharmacies via our partnership with McKesson and are continuing to pursue additional partnerships with institutional and government agencies to advance testing accessibility. We did complete the 108 million tests U.S. government contracts in the second quarter. Discussions with the U.S. government are ongoing. However, we aren’t including further government orders in our revenue expectations at this time. Turning now to operational excellence. This is a bit of a soup to nuts category, but I point to a metric that is both a roll-up and a single data point to watch. We believe we are on track to deliver a third of our targeted 90 million cost synergies in 2023. We are well on our way with competitively bidding insurance and audit fees, technology agreements, and indirect sourcing consolidation, and eliminating duplicate costs as we bring the businesses together. Our cost synergy target does not include the $45 million in interest expense savings that we have secured. Achieving our cost synergies is critical to our integration planning, and accordingly, the board has now decided to hire a Chief Administrative Officer to run the integration and strategically build our corporate culture. We want to build our brand reputation so that we are an employer of choice, able to attract and retain talented people at all levels, with engaging and rewarding careers. Keeping people happy, engaged, and productive are all areas on which our Chief Administrative Officer is focused. Strengthening our supply chain is another operational priority to help meet our customer commitments. Given our experienced supply chain team, coupled with our strong balance sheet and cash flow, our capacity to stabilize our supply chain and inventories could become a differentiated capability that we would leverage to compete in the marketplace. If we make it a priority and a must-have, it could potentially make supply chain a competitive advantage. All companies are facing supply chain challenges, but not all will be able to address them equally. Regardless of location, figuring out how to leverage all our plants and equipment to drive our business forward is a priority. Right now, for a number of products, there’s more demand than we have been able to meet, and we are working to hire new teams throughout all our factories to step up capacity. For example, we know there is more demand for clinical chemistry consumables, integrated instruments, and Savanna than we have been able to produce, and while production has ramped, we are managing our customer contracts and expectations based on our ability to deliver instruments with the availability of semiconductor chips, as well as the availability of consumables. Again, building out redundancy across our supply chain is so important, as we believe it could turn into a competitive advantage, allowing us to meet elevated demand when our key competitors may not. Last, but far from least on our list of strategic priorities is capital deployment. From the standpoint of our strong balance sheet and cash generation, we have the flexibility to allocate funds towards several strategic priorities. We look at our capital deployment opportunities in five buckets: investing in R&D, manufacturing capacity expansion, debt paydown, share repurchases, and strategic M&A. Investing in our business is critical to our growth, which is why investing in R&D and in our manufacturing capacity are our top capital deployment priorities. We are investing in R&D both for supporting menu expansion across our platforms while also driving development of innovative new instruments and technologies. We are also putting money into building additional manufacturing capacity to meet demand for our broad portfolio, including Savanna and consumables for our VITROS analyzers. The next item is debt paydown; the combination of Quidel and Ortho was structured such that we have a very attractive debt profile, which we intend to improve over the coming years as we work through our current integration plan. Also under consideration is returning capital to shareholders via a share repurchase program. Strategic M&A is our capital priority, but we will consider the right opportunities as they present themselves. We will continue to be very selective and opportunistic, valuing the right organizational fit as our main criteria. If we execute on all five of these strategic priorities, we believe that we will be better positioned to drive innovation, support long-term growth, and unlock shareholder value. In closing, I’d like to thank all the QuidelOrtho team for their incredible work and commitment to bring us to this point. We have many opportunities ahead of us to continue driving improved outcomes for our patients across the globe as we expand our portfolio, extend our reach, and make progress in integrating our organization. I look forward to advancing this mission to drive long-term growth for our business. With that, I’d like to turn the call over to Joe to further discuss our Q2 financial results and 2022 guidance. Joe?

Thanks. Good afternoon, everyone. I’ll begin with a bit more detail on our operating results for the quarter. As mentioned previously, to facilitate a comparison of the company’s operating performance from the second quarter of ‘21 to the second quarter of ‘22, all figures that I reference are presented on a supplemental combined basis, as if Quidel and Ortho have been combined for these comparable pairings and may be referred to as supplemental combined information. So starting with a breakdown of revenue on slide 13. In the second quarter, we recorded revenue of $899 million, an increase of 38% in constant currency. Currency translation decreased sales growth by 320 basis points resulting in 34% total sales growth. Revenue growth was primarily driven by the strong recurring revenue pull-through on our broad instrument portfolio serving the diagnostic continuum, as well as QuickView sales to government and retail customers. In the second quarter of ‘22, we generated $298 million in COVID-related revenue. So excluding COVID-related revenue, total revenue increased 9% in constant currency, driven by point of care and molecular diagnostics. Looking at year-to-date, total revenue was up 57% in constant currency to $2.4 billion; again, excluding COVID-related revenue, total revenue increased by 11% in constant currency. Turning to our Q2 performance by business unit: point-of-care revenue grew 181% in the quarter and grew 19%, excluding COVID-related revenues. This is largely driven by the pull-through of our broad respiratory menu. Labs revenue, which includes Ortho clinical labs and non-core revenue, as well as Quidel specialized diagnostic solutions, grew 3% in the quarter and grew 6% excluding COVID-related revenues, largely driven by strength, including clinic and asset revenue. Transfusion medicine revenue grew 9%, driven by strength in donor screening, notably plasma, which is a smaller market growing wealth and twice the blood market. Molecular diagnostics revenue declined 40% in the quarter but grew only 45% excluding COVID-related revenues, largely driven by strength in Lyra, Savanna, and Solana product lines. Now turning to our quarterly performance by geography on a constant currency basis: North America revenue grew 59%, EMEA grew 6%, China grew 25%, and other regions, which includes Latin America, Japan, and other Asia-Pacific markets, grew 2%. Excluding COVID-related revenue, North America revenue grew 16%, EMEA grew 8%, China declined 10%, and other regions grew 5%. In North America, our largest geography by revenue delivered strong growth driven by point of care labs and transfusion medicine. Point of care was particularly strong here, with the shipment of the last 35 million tests to the federal government pursuant to our 108 billion test contract. However, we still grew mid-teens, excluding COVID-related revenue, driven by pull-through of our respiratory revenue on our large Sofia install base, as well as strength in clinic and consumables and donor screening. In EMEA, strong growth was driven by labs, strength was particularly notable in clinic across Western Europe as well as Eastern Europe and the Middle East. In China, our team executed exceptionally well despite the numerous macro challenges including COVID-19 lockdowns that continued longer than expected in the quarter, as well as localization and more onerous import application requirements. Looking ahead, we will continue to monitor the situation closely for further outbreaks and regional lockdowns. China is a very profitable market for us and is a big investment area, as evidenced by our process of expanding our footprint with both analyzer and assay partnerships with the goal of providing a local manufacturing presence in the near term. Now, looking at our revenue by category, recurring revenue—which includes reagents, service, and other consumables—grew 1% and was up 9% excluding COVID-related revenue driven by across-the-board strength and many pull-through in our instruments. QuickView revenue grew 756%, largely driven by COVID-19. Instruments revenue grew 2%, which is an improvement from the first quarter, but open lab instrument orders due to global supply chain challenges are relatively flat sequentially, approximately 600 instruments. Now turning to slide 14. I’d like to comment on our second quarter financial performance versus the prior year. Again, on a supplemental combined basis, we delivered a strong quarter of performance at the top line with improvements in gross margin, operating expense, and free cash flow in the quarter. Profit margin for the quarter was 53.6%, which is an 80 basis point increase versus prior year due to volume growth, mix, and positive pricing in both labs and transfusion medicine, partially offset by lower margin on COVID-related revenue, including a $25 million QuickView inventory reserve recognized in the quarter due to the timing of a government order. Moving down to P&L, R&D expenses increased 2% year-over-year indicative of our investments in our instrument platforms and menu expansion, including for necessary global regulatory clearances. Sales, marketing, and administrative expenses were flat as operational improvements offset distribution cost increases, including COVID-related expenses. As a percentage of revenue, sales, marketing, and administrative expenses decreased by 100 basis points year-over-year to approximately 22%. Adjusted EBITDA grew 75% to $291 million, and adjusted EBITDA margin expanded 760 basis points year-over-year to 32.4%, largely driven by the previously mentioned drivers of gross margin and efficient operating spending. Net interest expense for the period was $29 million, which is a decrease of $4 million as anticipated due to lower interest rates, partially offset by the increases in the average outstanding debt balances related to the combination. Our provision for income taxes was $63 million compared to $13 million for the prior period. On a supplemental combined basis, our adjusted earnings per fully diluted share for the second quarter increased 123% year-over-year to $2.12 driven by the increase in our COVID-19 guidance and our solid operating performance as well as lower interest expense. The previously mentioned QuickView inventory reserves actually reduced adjusted EPS by $0.20. Turning to cash flow and balance sheet on slide 15; in the second quarter and on a GAAP basis, we generated operating cash flow of $225 million after funding $26 million in CapEx and adding back $80 million in acquisition-related costs, we estimate recurring free cash flow to be $279 million. We ended the quarter with cash, cash equivalents, and marketable securities of $446.7 million and total debt of $2.7 billion. We ended the quarter with a 1.1 net debt to EBITDA leverage ratio on a supplemental combined basis. If COVID revenue declines to endemic levels of revenue over the coming year, we expect leverage to increase to roughly two times. So now turning to our outlook for the remainder of the year on slide 16. Firstly, I’d like to provide some broader context on our full 2022. The point-of-care market is showing signs of strength, which we expect to continue to translate into strong non-COVID recurring revenue portal and our large installed base of Sofia instruments. We expect our labs and transfusion medicine businesses, excluding COVID-related sales, combined to grow mid-single digits. Savanna sales in Europe are expected to drive growth within our molecular diagnostics business. China continues to be an important growth driver for our business, and we expect recurring revenues to grow mid-single digits; however, instruments are expected to be soft due to previously mentioned lockdowns and by local requirements. Inflation and global supply chain disruptions continue to be a challenge; we are seeing greater access to semiconductor chips and expect challenges to further ease as we move through the back of the year and into 2023. So, in light of all these dynamics just mentioned, we are introducing supplemental combined fiscal year ‘22 guidance as follows: first, revenue excluding COVID-related sales is expected to grow 6% to 9% on a constant currency basis to $2.49 billion to $2.57 billion. Next, we expect COVID-related revenue to be $1.29 billion to $1.34 billion in 2022, including $1.15 billion in the first half of the year. That compares to $1.3 billion recognized in fiscal ‘21. Total revenue is expected to grow 3% to 6% on a constant currency basis, to $3.78 to $3.91 billion. Adjusted EBITDA is expected to be $1.38 billion to $1.45 billion, representing a margin of 36.5% to 37%. Finally, adjusted diluted EPS is expected to be $11.80 to $12.75, based on full-year diluted weighted average share count of 68 million. In addition, I’d like to provide some substance that likely will be helpful for my own purposes. At current rates, currency translation is expected to decrease full-year sales growth by 150 to 200 basis points. We expect flu-related revenue to be $200 million to $260 million in the full year ‘22, including $121 million in the first half of this year, compared to $72 million in fiscal year 21. Given the seasonality in our business, including our above expectations for flu, the fourth quarter is expected to grow at least 20% over the third quarter. We know that there are no differences in the number of billing days in 2022 compared to 2021. Net interest expense is expected to be in the range of $118 million to $123 million with most of the decrease versus the prior year coming from the fourth quarter run rate than the second half of ‘22. We are expecting a tax rate for the full year of approximately 25%, and given our $1.2 billion in NOLs, we expect approximate savings of $20 million in cash taxes this year, and $40 million to $50 million on an annualized basis. In the second half of the year, we expect adjusted free cash flow to be $130 million to $180 million. With that, I’ll turn the call back over to Doug to make a few summary comments.

Thanks, Joe. In summary, we had a strong quarter. The integration is going well, and we’re even more excited about the growth opportunities ahead. To provide investors with deeper insights into our business and our key growth initiatives, I’m pleased to announce that we plan to host an investor day on the afternoon of December 13, 2022, in New York City. I look forward to engaging with you in that forum, which will include in-depth management presentations and opportunities for Q&A and informal interaction with the management team. More details about that event will be forthcoming. But please save the day on your calendars. And with that operator, we are now ready to open the call for questions.

Our first question is from Brian Weinstein with William Blair. Please proceed.

Hi, guys, this is Dustin on the line for Brian. I know you provided us with full-year guidance and some color on the fourth quarter, but I’m wondering if you could provide a little bit more detail on the different business segments as we move to the third and the fourth quarter? How should we expect this to move relative to the second quarter, up or down sequentially? Any additional insight that would be helpful. Thank you.

Yes, I will just start by saying we’re not going to provide a lot of detail here, but I think it’s safe to say that for both companies, Q3 is typically a softer quarter. And so we’re looking more at sharing with you what we expect for the total for the second half. And I think that’s the guidance that you’ll provide. What else would you add, Joe?

No, I think that covers it.

Got it. Great. Thank you. I guess as you provide the guidance for 2022, just wondering how you guys are thinking about next year? I know there’s certainly a lot of variables with COVID coming out of the business, and certainly have a lot of macro headwinds on your hands. But if you can talk about next year, just where we should be thinking about numbers and where the different businesses can go?

At this stage, what we see is that we should be able to deliver on the cost synergies that we suggested, and that does not include the $45 million in interest rate, interest expense, excuse me, reduction annually. On the revenue side, provided that we can manufacture the instruments that we have in the forecast, we feel very comfortable both on the clinical chemistry and amino assay systems as well as on the Savanna. And what I would point to, I think, generally, is to the S4 and those forecasts and suggest to you that those are solidly intact. What else would you add?

I would just add that it will reiterate what we’ve said about 2023 and beyond, that the top-line number ex-COVID will be in the high single-digit, low double-digit range. We believe that the COVID revenue, once it gets into an endemic stage, as we move into next year, will be in that $150 million to $200 million range annual recurring revenue.

Which wouldn't necessarily capture the ABC combo revenue.

Correct.

Great, thank you for taking the questions.

Thank you. The next question is from the line of Jack Meehan with Nephron Research. Please proceed.

Thank you. Good afternoon. I really appreciate all the color in the deck and release today. I wanted to start with a question for Joe or Doug regarding the guide here. So the $11.80 to $12.75 EPS. So you did $8.04, I’m sorry, $2.04 in the first quarter to $2.12 in the second quarter; by my math, that’s a buck 64 to $2.59 in the second half of the year, kind of annualized is $3.28 to $5.18. Am I thinking about it the right way in terms of like starting to build between 2023 and layering on some of the cost synergies, maybe growth? Just like any color around starting to think about where 2023 EPS might come out would be helpful.

Yes, go ahead Joe.

Hey Jack, it’s Joe. Yes, I don’t want to get too much into 2023 other than what we just discussed in the previous question, but when you look at the guidance for ‘22 that we just gave, keep in mind the comments I made about Q2, Q3, and Q4 seasonality. Q3 is historically a seasonally low quarter for both sides of the business, Ortho as well as Quidel. And so you see the lion’s share that second half EPS falling into Q4 versus Q3. Again, as far as 2023, as you think about the cost base, I do think that you can use the cost base on a supplemental combined basis in the operating expenses that we’ve given to you in the information center a month or so ago, as well as what’s in your release today. You can use that as a guide for the second half operating expense and even as a jumping-off point as you move into ‘23 and then pull the synergies, the impact of the synergies off that base. We’re running out right now for operating expense. Does that make sense?

Yes, it does. Second question on Sofia. Sorry if I missed this during the script; just what were the Sofia sales in the quarter? And I know Doug and Joe, you talked about just confidence in kind of broader utilization. Long term, if there’s color you can provide around just what you’re seeing in the field on non-COVID testing on Sofia. Any updates would be great.

Yes, thanks, Jack. It’s a really intuitive question. When you back out COVID-19 and look at the Sofia business, what does that look like? The comparison year-over-year is a difference of about 25%. So we’re up 25% in revenue on a trailing 12 on the Sofia business, about 25% over the prior year.

And Jack, if you just take that a step further, if you break it into price and volume, when you look at price, Jack, it’s up slightly, flat to up slightly, which means that it’s primarily all volume. When you’re looking at the pull-through of Sofia, it’s almost all volume. So it’s a really good sign for us on that trailing 12-month basis.

Just one clarification on that 25%. How much of that is coming from ABC? Are there any other tests that are standing out as you look at the utilization?

You will see some pull-through with the other facts for sure. But you’re right in saying that the competitor has driven a lot of this, especially the flu product, which is both individual and because you remember last year, Jack, in the quarter, very, very little flu.

Yes. And then that last question. Just to be clear on the Savannah timeline, it sounds like 510-K approval does that look more like 2023 now? Just any comment on sales in the quarter there? Thank you.

Yes, we’re going to introduce the product in Europe on a full launch basis. So obviously, we have the EUA for the U.S. We expect to have the 510-K submission by the end of the year for sure. Is that? Was that your question?

We’ll have the submission.

Yes, we submitted the EUA for RBP4 in May. And then we’ve been working on the 510-K sets. So we expect to have that done by the end of the year.

Correct.

But then it’s like 90 days? Well, historically, it’s been like a 90-day review after that, right?

Yes, but remember the pressure that the FDA is under with a huge workload. And we don’t know exactly all the requirements for 510K clearance may be at the end of the day until we get into interactive discussions with the reviewer. So you’re right; 90 days is typical. I think the FDA does a pretty good job on these high-priority products, but there might be a little cushion. But I don’t think we’re going to be great with it right now.

Okay, sounds good. Thank you, guys.

Thank you. The next question is from the line of Andrew Cooper with Raymond James. Please proceed.

Hey, everybody, thanks for the question. Maybe first on the financials, just thinking about the longer-term targets you laid out when the deal was first announced, that 30% EBITDA margin target. Now, obviously, some things have changed on the inflation side and just the overall cost side, as well as the FX side. So how do we think about that bogey, if it changed at all? And then if there’s any difference to the timeline to get there, and anything that relates to that would be super helpful?

Well, Andrew, your question is certainly timely. We were talking about this just a couple of hours ago. Yes, there are some moving things that we are having to evaluate. So then the question is, can we achieve more cost synergies than we thought before? I think what I would say is, even if we can’t get to greater than 30% EBITDA in 2023, if we cannot, we’re still not changing the target for the timeframe; we’re still going to work to try to get back over 30%. I don’t think that’s an inappropriate goal. But you are right, there are a lot of factors including how much profit can we make when we can? What, if any regulatory hurdles get in our way? What’s happening on the supply chain side with costs because of inflation? These are all factors that obviously, were not known when we initially modeled all of it. So we still firmly believe we can get there. We wouldn’t you say that’s true, Joe?

Yes, I agree. Certainly not coming off the 30%. But I’m arguing, when you do the math and the guidance we gave, you’ll see that the second half is below that 30% margin. But that’s because, again, the business is seasonal; it is low in Q3, and that has historically been the case for years for both businesses. And then Q4, you’ve got a heavier load of instrument revenue that typically comes through in the fourth quarter. So when you look at the second half versus a full year, that’s probably going to be our lowest EBITDA margin quarters. As you move into ‘23, not only do you get the cost synergy tailwind that Doug mentioned, but you’re also going to get the tailwind of the growth on Savanna. As that ramps up, when that launch continues, and net revenue continues to grow, that’s going to drive some GP and EBITDA margin tailwind to march a step closer to that 30% or over that 30%.

Thank you. Our next question is from the line of Casey Woodring with JP Morgan. Please proceed.

Hi, guys. Thanks for taking my questions. So I know we’re sort of all over the place right now with pro forma numbers, but it looks like EPS came in below expectations. And when accounting for that inventory reserved dynamic, I think that’s likely due to QuickView margin assumptions. So can you maybe help us think about what the drop-through was there now? Is likely pricing has come down versus where you may have been modeling prior?

So Casey, just to reiterate, the suggested EPS is coming.

Yes, so the QuickView inventory reserve that we mentioned, the $25 million net of tax, that’s an $18 million hit. So it’s a 28% impact on the quarter. So obviously, if you remove that, you would have exceeded expectations on a lot of fronts. Now that reserve, depending on what happens with second half COVID revenue, could come back. I’m not saying it will, but it could.

But like I said, we’ve covered both sides; we’ve said it doesn’t happen, we’ve got to reserve to take care of the obsolete inventory. On the flip side, we also said we’re ramping up because we’ve been strongly encouraged to keep manufacturing products, which we will do. So in the event, we’re going to be well-placed as we move forward. But there is a potential that we don’t need that reserve guide.

Correct.

Got you. And then just on the clinical labs business, so just curious on headwinds in China on the non-COVID piece have subsided here in Q3 and if anything’s being contemplated for lockdowns in the back half of the year. And then on that open order comments, the 600 instruments; curious on what labs would have grown if you could have filled those open orders? Thank you.

Yes, so you’re right; we do have a number of open orders. I would say just generally before flipping over to Joe, my impression is that the Chinese team has weathered this pretty nicely, the lockdown and all that. We also have plans in place to make sure that we can compete with the changes and whatever requirements for local manufacturing, etc. Have you done the math in your head already? I was just trying to give you the math.

Yes, I can try to hit both of them quickly. We have in the guidance we provided anticipated more caution on future lockdowns in China as well as the buying local movement in the country that’s potentially impacting instrument revenues. So all that factored into the guidance. The other thing you need to keep in mind, Casey, is that the Beckman deal is impacting revenue in our China market too. So if you look at the Q2 numbers that we’ve just presented, and we show that the China market is down 10% in constant currency, in the second quarter, if you were to take out the impact, it would actually be up low single digits. So that has a big impact effect. And again, that has no impact on the margins; it’s just a revenue play. So just keep that in mind as well. And on your install base or your insurance backlog question, it would have added about two points of growth into the numbers, had we the ability to get all this out.

Thank you. Our last question is from the line of Alex Nowak with Craig Hallum. Please proceed.

Good afternoon. So maybe going back to the ABC combo first. This is going to be the first potentially normal respiratory season in a long time. So just how are the point-of-care customers approaching it this year? Is the expectation that if they have associated, they’re going to be ordering the ABC combo? Are you starting to see any purchases ahead of that season yet? And then maybe any status with the ABC OTC product.

Yes, I think we see evidence, Alex, that this is a viable product in the space. We certainly saw ourselves with the product. And we are building products now with that expectation. So who knows what flu, but at the end of the day, there’s certainly concern at the government level that there’s going to be flu in the back half of this year. So that’s what we’re planning on. That’s what we’re seeing early on in terms of demand. All of them are returning to that crazy demand that we saw in Q4 2021, no. But I do think there’s realistic demand for the product.

Okay, understood. And then for the R&D channel, you mentioned all the systems you’ve got in the pipeline here. If you had to name the top one or top two projects, if the menu expansion Savannah menu expands, your cardiovascular Ortho, just what are the first or second projects that are your main priority for the combined company?

There are a lot of priority ones. For example, it started on the transfusion medicine side. We know that to be competitive longer-term in that space, we need to provide better solutions. And so we’ve got a project internally that we've been calling down, and that’s progressing. That’s probably the third I think of that R&D budget is on that project alone. Savanna, clearly, spending what’s necessary to make the transfer from R&D into manufacturing at scale is a big lift and a big effort as well. Don’t forget also we’ve got project leapfrog running in the background too, which is our next generation amino acid platform. So there are three or four big hitters, Alex. I’ll just stop there because I realize at the end here. What I would say...

I was going to turn it back to Doug Bryant for closing remarks.

Great. Perfect timing. So in conclusion, Q2 was our first quarter reported as a combined company. It was certainly fun putting the call together this quarter for sure. No matter how you slice it, this stands out as a strong quarter across our commercial, corporate, and cultural metrics. We came in with a roadmap. And these results underscore our ability to execute on strategic plans. There’s a lot of talent in this organization. Achieving our expected cost and revenue synergies will be a three-year marathon. It’s not a one or two-quarter sprint. But we believe our current pace is exceeding our plans, the necessary pieces that are here match the fit that we anticipated. As I had mentioned earlier, the cultural chemistry is even better than I had expected. I’m encouraged; our team is excited. We’re moving forward with purpose and confidence, happy in the knowledge that we’re making a difference for human health and, equally important, for our people. On behalf of our entire management team, I’d like to thank you for your continued support and interest in our new company, QuidelOrtho. We look forward to sharing our journey with all of you. Thanks, and have a great day.

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