QuidelOrtho Corp (QDEL) Q3 2022 Earnings Call Transcript

Welcome to the QuidelOrtho Third Quarter 2022 Financial Results Conference Call and Webcast. At this time, all participant lines are in a 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, this conference call is being recorded. An audio replay of the conference call will be available on the company's website shortly after this call. I would now like to turn the call over to Bryan Brokmeier, Vice President of Investor Relations. Bryan?

Thank you, operator. Good afternoon, everyone, and welcome to the QuidelOrtho third quarter financial results conference call. With me today to discuss our financial results are Doug Bryant, QuidelOrtho's Chairman and CEO; and Joe Busky, QuidelOrtho'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 statement. The statements we will make during this call about the company's future expectations, plans and prospects include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, 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 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 quarterly report on Form 10-Q filed with the SEC on August 5, 2022, 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 expectations as of today. Except as required by law, we undertake no obligation to update any forward-looking statements or any time-sensitive information to reflect future events, developments or changed circumstances for any other reason. Also, during today's call, to facilitate a comparison of the company's operating performance from the third quarter of 2021 to the third quarter of 2022, we'll be discussing supplemental third quarter 2021 revenue and other supplemental adjusted operating results as of Quidel and Ortho to be combined for the applicable periods. 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 3 for a list of non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the appendix to the investor presentation and press release issued this afternoon, both of which are available on the Investor Relations page of the Quidel 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 Doug Bryant, QuidelOrtho's Chairman and CEO. Doug?

Thanks, Bryan. Good afternoon, everybody, and thank you for taking the time to join our call today, the first call in which we are reporting results achieved as a combined company. When I look at our financial results for the quarter of this year, the third quarter, the underlying base business grew 6% year-over-year despite industry-wide headwinds and constant currency revenue growth, excluding COVID-related revenue, grew 3%, driven by strength in our point of care and transfusion medicine businesses. The Beckman BNP assay transition was a three-percentage-point headwind to revenue in the quarter. Adjusted EBITDA margin of 29% and adjusted EPS of $1.85 reflect very good operating leverage and solid earnings for the quarter. These better-than-expected results position us to raise our guidance for the full year, which Joe will share in further detail in a few minutes. For the remainder of my comments, I will focus on the strategic priorities that I outlined on our last earnings call, which are: one, integration and corporate culture; two, product innovation; three, global commercial excellence; four, operational excellence; and five, capital deployment. Beginning with the integration and our corporate culture. As I've mentioned previously, the integration of the organizations and preserving the best attributes of both cultures is the top priority for the executive team and especially for me. While it's still the early days since the close of the transaction, we're off to a strong start. Many teams across the organization have demonstrated exceptional focus, agility and shared purpose as we've introduced new structures, processes and systems to optimize our operations. I must say that communication and collaboration across the entire company, even among teams that weren't initially fully integrated, have exceeded my expectations. The leadership team's two levels below the office of the chief executive are established. And over the last quarter, our operations team implemented its new structure, joining finance, R&D, HR, legal, IT, customer service and our four business units in achieving full team integration. Our commercial teams outside the U.S. are also fully integrated. The last remaining team to fully integrate is the U.S. commercial team. We've identified every role, and by the end of this year, the new organizational structure will be communicated. Product training and cross-selling are expected to begin in the first quarter. With the organizational work substantially completed, we've now identified and announced our operating structure from the executive leadership team down through all supporting levels, a real milestone that aligns and strengthens the impact of our entire organization. Although we've made significant strides in integration, our work continues. Our integration program management group continues to attract 15 active work streams with milestones identified through the first quarter of 2023 and continued planning for future state operational processes and efficiencies. Teams have been engaged, cooperative, and professional, fully embracing the collaborative culture and teamwork needed to deliver on our commitments when we announced the integration of the companies. This process highlights what we've been saying; while integrations are always challenging, we believe the combination of Quidel and Ortho is less complex than other integrations in part because we aren't consolidating manufacturing facilities, don't have any product overlap and our commercial teams don't have to start selling one product in favor of another. This merger, although bigger, is certainly simpler and more straightforward than what we accomplished very well with the integration of the Alere assets, a two-year process that required a dependence on transition services and significant third-party involvement to operate the business. Moreover, employees are largely happy with the combination and the opportunities that the combined company is creating. The very high response rate on our recent employee happiness survey demonstrated excellent employee engagement and preliminary results show very favorable responses. To that end, our employee turnover is at expected low levels, giving us confidence that we are securing the talent we need to successfully complete the integration, execute on our strategic priorities, and drive strong, sustainable growth. I couldn't be prouder of our team and our progress. Now turning to cost synergies. We have now identified at least $50 million in cost synergies well above our $30 million 2023 target. We are amid our annual operating plan process and believe that there could be further upside. Moving on to product innovation. We are managing approximately 100 R&D projects, and there's opportunity to optimize our focus and our spend. During the quarter, we initiated an R&D portfolio review to rank our projects based largely on NPVs that have been adjusted for technical, market, and regulatory risks. This is helping us prioritize resources for the most important projects. As you can imagine, many of the most important R&D projects are to advance our Savanna, Sofia in vitro portfolios. Other exciting long-term projects include Leapfrog, Sofia Q and our next-generation donor screening platform, which Ortho used to call Dry Dry. We will further expand on all of these at our December Investor Day. Today, I'll focus my comments on Labs, Savanna, and Sofia. First, our Labs business. For the second quarter in a row, the Labs business unit launched seven new and refreshed assays globally. Importantly, we received China's regulatory clearance for the Vitros-XT3400 chemistry system. With this approval and planned commercialization in Q4, this system will accelerate our China growth strategy by introducing next-generation digital imaging technology that enables higher testing throughput, improved testing accuracy, and best-in-class reliability. We are planning for manufacturing of the Vitros line of analyzers in China, given localization requirements, and expect these efforts to have an impact in 2023. Secondly, Savanna. We are seeing demand in Europe and are increasingly confident that Savanna placements and revenue will accelerate throughout 2023. We continue to focus on overcoming manufacturing and supply chain challenges as we ramp up production of both instruments and cartridges. Additionally, we completed development activities for all Savanna panels planned for launch in 2023. Yet in the U.S., there are signs that the expedited regulatory path for FDA emergency use authorization is changing. We now believe that the surest pathway to full availability of Savanna instruments and panels is to include immediately 510(k) clearance and CLIA waivers. We are making that shift in both our regulatory and commercial strategy so that we can bring Savanna to the U.S. market as quickly as possible. Given the strong demand in Europe, Middle East and Africa for molecular panels versus the limited opportunity we could achieve by launching in the later stages of the U.S. respiratory season, we are concentrating both our Savanna product output and all near-term commercial activities on Europe and select other CE Mark countries. That said, we are moving forward on our U.S. launch plan, including the placement in Q4 of about 100 instruments to gather valuable data to support the full U.S. launch in 2023. With our global commercial team firmly in place, we believe a concerted push in Europe, Middle East, and Africa, and other countries where we already have government clearances is warranted and can support our planned revenue targets for the year. Finally, Sofia. While peak respiratory virus season is just now beginning, QuidelOrtho's Virena data indicate and the CDC has reported increasing positivity rates of respiratory diseases, including COVID-19, influenza, and RSV. The influenza season began sooner in the U.S. than is typical with high ILI activity in the Mid-Atlantic, Southeast, and increasing cases in the Midwest. Overall, positivity rates have reached 25.5%, the highest in 31 months, and positivity rates continue to climb. Influenza test revenue was therefore higher than we had anticipated or have seen in a non-flu quarter. On a per instrument basis, non-COVID Sofia revenue for the trailing 12 months was the highest since the third quarter of 2021 and continues to strengthen, driven by our full respiratory menu. As anticipated, we didn't see distributors stock up influenza tests significantly in the quarter, but we did see them build significantly higher inventories for RSV and strep, which are much smaller than influenza volumes. Moreover, our cumulative Sofia placements now total 83,000 instruments, up from 80,000 last quarter, which may suggest healthy new instrument placement demand over the next several quarters. Next, global commercial excellence, our third strategic priority. The relationships that each of the U.S. commercial organizations has developed and maintained over the years are strong. To take full advantage of those relationships, we are moving to a structure that Quidel had good success with, in which one team of sales representatives covers hospitals, clean labs, and blood banks, while a separate team of sales representatives works with our distribution partners as a force multiplier to cover physician offices, clinics, retailers, and other points of care. Additionally, with organizational structures in place and the other global regions, we are completing go-to-market analyses across the combined product portfolio. For the remainder of the year, our primary commercial focus is to finalize the integration of the U.S. commercial organization, close 2022 strong, and be ready to enter our major markets as QuidelOrtho in January of 2023 as scheduled. In the meantime, despite industry-wide challenges in China and with supply chains, our Vitros integrated analyzer installed base grew 11% year-over-year, and automation grew 24%. As those headwinds subside, we expect further penetration into the mid- and high-throughput lab segment with our integrated analyzers. Moving to our COVID point-of-care tests, the federal government announced its intent to purchase over 100 million additional home rapid tests from multiple domestic manufacturers. We continue to participate in the process and have advanced to the final stage. While we believe our success at some level is likely, the timing is uncertain. We are, therefore, not including any additional government revenue in our 2022 guidance. In the retail market for COVID tests, we continue to work with all major retail distributors on ways to expand our availability. During the quarter, we returned to shelves at all major retail distributors, and for one, we became their private label manufacturer. We believe that through a combination of current moderate factory output, current inventories on hand, and a strong supply chain, we're in good shape and can quickly scale up if we are confronted with demand surges in this respiratory season, including for respiratory pathogens such as influenza and RSV. Turning now to operational excellence. We're hard at work driving operational excellence throughout the organization, with a particular emphasis on leveraging our balance sheet to strengthen supply chains. We believe that our ability to pivot quickly away from sole-source supplier agreements could be a competitive advantage, especially relative to smaller competitive entrants in our space. As an example, in the third quarter, we brought on more suppliers of semiconductor chips and grew our safety stocks generally, which have improved consistency of the supply of many raw materials. In the future, we believe that a track record of reliable product supply will become a must-have for our current and prospective customers. All companies are facing supply chain challenges, but not all are able to address them equally. Looking at our manufacturing capacity, we have capacity at our Rutherford site that manufactures up to 16 million QuickVue tests per week. At our McKellar site, we have capacity and manufacture up to 4 million Sofia kits per week. At our Rochester site, we have the capacity to manufacture up to 53 million slides per week, with the two additional lines coming online in 2023 that will get us to 63 million tests, excuse me, slides per week. We now have approximately 600 open labs instrument orders relatively flat sequentially. We expect that to modestly increase by the end of the fourth quarter, but we have a plan in place to begin clearing back orders in 2023. Lastly, over the past couple of months, we've overcome Savanna instrument supply chain challenges, begun ramping our instrument manufacturing capacity, and completed the setup and validation of the first of two low-volume cartridge manufacturing lines. This allows us to expand our Europe, Middle East, and Africa commercialization for the current respiratory season. Our second low-volume line is expected to be brought online during the fourth quarter. We believe these two lines should be more than sufficient to meet pull-through demand given the number of instruments we expect to ship. Our two automated high-volume lines are expected to be up and running by mid-2023, ahead of our U.S. commercial launch. Our last strategic priority is capital deployment. A healthy balance sheet and consistent cash generation give us the flexibility to allocate funds toward several strategic priorities. Our priorities are R&D investment, manufacturing capacity expansion, debt paydown, share repurchase and lastly, strategic M&A. During the third quarter, we announced a $300 million share repurchase authorization. The repurchase program reflects our confidence in our long-term growth strategy, the sustainability of a broad base of recurring revenues, cash flow, and the durability of our margin profile. We don't intend to consistently buy back our shares each quarter, and we don't need to complete the entire $300 million in the two years that are authorized. We put the repurchase program in place to take advantage of what we view as a dislocation on the value of our shares. While the accretion of our share repurchase program was particularly attractive in the third quarter relative to debt paydown, looking ahead, we intend to prudently balance our share repurchase program and our debt paydown. The in vitro diagnostic market has historically been relatively insulated from economic slowdowns. However, we are acutely aware of leverage concerns and an uncertain macro environment. We are required to pay down $200 million of our debt each year and have a preference to pay down even more, especially as cash flows benefit from COVID and other respiratory-related revenues that are greater than our long-term plan. With that, I'd like to turn the call over to Joe to further discuss our Q3 financial results and 2022 guidance. Joe?

Thanks, Doug, and 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 third quarter of '21 to the third quarter of '22, all growth rates that I referenced are presented on a supplemental combined basis as if Quidel and Ortho have been combined for the applicable periods and may be referred to as supplemental combined information. Starting with a breakdown of revenue on Slide 9. In the third quarter, we recorded revenue, excluding COVID-related revenue, of $613 million. This is up 3% in constant currency driven by point-of-care and donor screening business units. The transition of Beckman BNP assay sales to Beckman was a 3% net headwind to revenue, so the underlying base business is up 6% year-over-year. As a reminder, in connection with the settlement of our litigation with Beckman in July 2021, Beckman started manufacturing and selling BNP assets. We continue to supply Beckman certain assay components for cash payments of $70 million to $75 million per year through 2029. The net impact of the arrangement is neutral to gross profit. The third quarter of 2022 is the last quarter we will experience headwinds related to year-over-year revenue growth from this transition to Beckman. COVID-related revenue totaled $171 million in the quarter. In total, we recorded revenue of $784 million, a year-over-year decrease of 22% in constant currency. Currency translation decreased sales growth by 230 basis points, resulting in a total sales decline of 24%. Year-to-date, however, total revenue was up 26% in constant currency to $3.2 billion. Excluding COVID-related revenue, total revenue increased 8% in constant currency. Year-to-date, the Beckman BNP assay transition was a greater than 3 percentage point headwind to revenue. So again, the underlying base business was up 12% year-over-year. Turning to our Q3 performance by business unit. Point-of-care revenue declined 39% in the quarter but grew 29%, excluding COVID-related revenue, largely driven by pull-through of our broad respiratory menu. These results reinforce our view that the Sofia system has been the beneficiary of tailwinds associated with increased respiratory testing, especially among the 83,000 cumulative instrument placements. Labs revenue declined 5% in the quarter and declined 3%, excluding COVID-related revenue due to continued challenges in China and with global instrument supply chains. Transfusion medicine revenue grew 1% with mid-single-digit growth in donor screening driven by plasma demand, partially offset by softness in immunohematology. Molecular Diagnostics revenue declined 72% in the quarter and declined 1% excluding COVID-related revenue business. This is on a relatively low base. As Doug discussed, we are concentrating both our product output and all near-term commercial activities for Savanna in Europe and select other CE Mark countries to meet demand in 2023. Now turning to our quarterly performance by geography. On a constant currency basis, North America revenue declined 29%; EMEA grew 1%; China declined 13%; and other regions, which includes Latin America, Japan, and other Asia Pacific markets, were flat. Excluding COVID-related revenue, North America revenue grew 6%; EMEA grew 2%; China declined 13%; and other regions grew 9%. North America, which is our largest geography by revenue, delivered strong growth, excluding COVID-related revenue, driven by point-of-care and transfusion medicine. Point of care was particularly strong due to two orders, an additional order from the 2021 federal government award and a smaller order from a state government, which combined for approximately $58 million in the quarter. Excluding COVID-related revenue, we grew 6% in North America, driven by pull-through of our respiratory revenue on our large Sofia installed base as well as strength in donor screening. In EMEA, the underlying base business grew 6% year-over-year, which excludes COVID-related revenue and the impact from the Beckman BNP assay transition. Notably, we had strong growth in Eastern Europe and the Middle East and Africa. In China, our team executed exceptionally well despite various macro challenges, including new COVID-19 lockdowns that reemerged during the quarter, as well as continued local requirements. Importantly, the Beckman BNP assay transition disproportionately impacts our China business, representing an 8 percentage point headwind to revenue growth in the quarter. The lockdowns negatively affected patient volumes and caused distribution partners to become increasingly cautious despite double-digit forecasted fourth quarter and customer demand for consumables. We're monitoring the situation closely for further outbreaks and regional lockdowns and will increasingly manage our channel to meet demand in other regions. Looking into 2023 and beyond, China continues to be a very profitable market and a big investment area for us. We are in the process of expanding our footprint with both analyzer and assay partnerships with the expectation of providing a local manufacturing presence in 2023. Now looking at our revenue by category. Recurring revenue, which includes reagents, service, and other consumables, declined 26%. However, the underlying base business was up 7% year-over-year, which excludes COVID-related revenue and the impact from the Beckman BNP assay transition. This is terrific recurring revenue growth driven by across-the-board strength and menu pull-through in our instruments. QuickVue revenue was flat, but was up 42%, excluding COVID-related revenue. Instrument revenue declined 20% as global semiconductor chip availability continues to limit our ability to deliver instruments in our Labs business. Open lab instrument orders were relatively flat sequentially at approximately 600 instruments. That said, customer demand continues to be strong, and we are prioritizing new instrument placements and integrated instruments in order to maximize our recurring revenue pull-through. Now turning to Slide 10. I'd like to comment on our third quarter financial performance below revenue versus the prior year, again, on a supplemental combined basis. We delivered a strong quarter of performance below the top line. Gross profit margin for the quarter was 56.9%, a 540 basis point decrease versus prior year largely due to the decline in COVID-related revenue as well as FX headwinds, partially offset by base business mix. Gross margins were up sequentially from Q2 due to product mix and exceeded our expectations due to strong revenue. Importantly, margins on COVID-related revenue over the last year have come down due to lower volumes and market dynamics. Moving down the P&L, R&D expenses increased 21% year-over-year, indicative of our investments in our instrument platforms and menu expansion, including for necessary global regulatory clearances. Sales, marketing and admin expenses were up 4%, driven mostly by distribution cost increases, including COVID-related expenses, partially offset by operational improvements. Adjusted EBITDA declined 48% to $226.8 million, largely due to the decline in COVID-related revenue as well as an increase in operating expenses. Adjusted EBITDA margin contracted 1,300 basis points year-over-year to 28.9%, better than our expectations due to the strong revenue. Net interest expense for the period was $29.1 million, a decrease of $5 million as anticipated due to lower interest rates, partially offset by the increase in the average outstanding debt balances related to the combination. Our provision for income taxes was $21 million compared to $77 million for the prior year period. We expect a full year adjusted tax rate of approximately 23%, and this is different from an expected GAAP tax rate of 25%. Our adjusted earnings per fully diluted share for the third quarter was $1.85 compared to $4.01 in the third quarter of '21 on a supplemental combined basis. The higher EPS in the third quarter of 2021 was driven by the greater COVID-19 volume and then in the third quarter of this year. Turning to cash flow and balance sheet on Slide 11. In the third quarter and on a GAAP basis, we generated operating cash flow of negative $9.7 million. After funding $25 million in capital expenditures and adding back $26 million in acquisition-related costs, we estimate recurring free cash flow to be a negative $10 million. This third quarter adjusted free cash flow was as expected, and fourth quarter cash flow continues to look strong. We expect adjusted free cash flow in the second half of 2022 to be in the $130 million to $150 million range narrowed from the prior range of $130 million to $180 million. In terms of returning cash to our stockholders, we repurchased 953,000 shares of our common stock for $74 million through our new share repurchase program. Although the company was authorized to repurchase $300 million of our common stock for a period of two years, we aren't committed to spend the full amount and will instead maintain a flexible and balanced approach to share repurchase and debt pay down. We ended the quarter with cash and marketable securities of $284.3 million and total debt of $2.7 billion after paying down $52 million in the quarter. We ended the quarter with a 1.4 times net debt-to-EBITDA leverage ratio on a supplemental combined basis. If COVID revenue continues to decline to an endemic level of revenue over the coming year, we expect leverage to increase up to approximately 2.5 times. During the quarter, we executed new interest rate hedges that lock in fixed rates for at least 70% of our debt for the duration of our term loans while leaving sufficient opportunity for an accelerated pace of debt paydown without risking an impact on the recognition of hedge accounting. For 2023, this provides us with a blended rate of 3.16%. Now turning to our outlook for the remainder of the year on Slide 12. First, I'd like to provide some broader context on our full year 2022 guidance. The point-of-care market is showing signs of strength, which we expect to translate into strong non-COVID recurring revenue pull-through on our large base of Sofia instrument placements. We expect our transfusion medicine business to grow mid-single digits, but instrument supply issues are negatively affecting Labs revenue. Savanna sales in Europe are expected to drive growth within our molecular diagnostics business, but off a small base. China is expected to be an important growth driver for our business going forward. However, due to continuing lockdowns and localization requirements, full year revenue in China is expected to be soft. Finally, 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 2023. In light of these dynamics, we are updating supplemental combined fiscal year 2022 guidance as follows: Revenue growth, excluding COVID-related sales narrowed to the high end of the range at 7% to 9% from a prior 6% to 9% on a constant currency basis. Revenue dollars, excluding COVID-related sales, is now expected to be $2.48 billion to $2.53 billion from a prior $2.49 billion to $2.57 billion due to increasing currency headwinds. We are raising our COVID-related revenue guidance to $1.4 billion to $1.43 billion in 2022, from a prior $1.29 billion to $1.34 billion, and this includes $1.32 billion through the first three quarters. We are raising total constant currency revenue growth guidance, which is expected to grow 6% to 8% from a prior 3% to 6% for total revenue of $3.88 billion to $3.96 billion, up from a prior $3.78 billion to $3.91 billion. Adjusted EBITDA guidance is raised to $1.49 billion to $1.53 billion, representing a margin of 38.4% to 38.6%. This is from a prior $1.38 billion to $1.45 billion, which represented a margin of 36.5% to 37%. Adjusted diluted EPS guidance is raised to $13.20 to $13.80 from a prior $11.80 to $12.75 based on a full year diluted weighted average share count of 67.8 million from the prior 68 million shares. Finally, in addition, I'd like to provide assumptions that might be helpful for modeling purposes. At current rates, currency translation is now expected to decrease full year sales growth by 200 to 250 basis points, and this is from a prior 150 to 200 basis points guidance. We expect full year flu-related revenue to be $230 million to $270 million, up from $200 million to $260 million, and this includes $176 million in the first three quarters. At the midpoint, this assumes about a 40% sequential growth for flu and ABC combo from Q3 to Q4. Our flu-related revenue outlook assumes that surges in COVID-19 do not dramatically reduce flu and RSV prevalence which could shift revenues to COVID at the expense of flu. There are no differences in the number of billing days in '22 compared to '21. Finally, net interest expense is expected to be in the range of $125 million to $128 million, from a prior $118 million to $123 million. With that, I'd like now to turn the call back over to Doug to make a few summary comments.

Thanks, Joe. In summary, the strong third quarter results enabled us to raise our full year guidance. We're particularly pleased with the pace of our integration and the milestones that we've achieved thus far, as well as the broad portfolio pull-through on our growing placements of Sofia instruments and the strong performance of our donor screening business. Thanks to the extraordinary dedication and cross-organizational collaboration of our people, we're achieving critical integration milestones, actively pursuing exciting new cross-selling opportunities, and hitting our synergy targets. With that, operator, we're now ready to open the call for questions.

Thank you. Our first question is from Andrew Cooper at Raymond James. Andrew, you can go ahead.

Hey, everybody. Thanks for the time here. Maybe first, Doug, if you could just give us a little bit of an update on the Savanna time lines with a little bit more detail in terms of any changes to which assays are leading other than, obviously, under the EUA and when you expect to actually submit those if you're implying a mid-'23 launch? What's the launch assay? And how do we think about how those pace through the year?

Well, thanks for the question, Andrew. Obviously, we're hedging the launch a little bit by suggesting that we're going to be moving analyzers that were slated to be shipped earlier in the U.S. in 2023, and we're moving those mainly to Europe, where we think there's plenty of demand and opportunity. There's nothing really that's changed in terms of when the panels will be launched. The only addition is that we're pulling up some of our thoughts with respect to 510(k) submission. And the reason we're doing that, obviously, is we're in ongoing dialogue regarding potential EUA for Savanna, obviously, for the U.S. We're in ongoing discussions and dialogue to see what further we need to provide in order to get that done if indeed we're successful. So again, there's nothing really different in terms of the timelines that we've communicated before. It's more that we're hedging. We're making sure that we don't really have a significant change to our revenue expectations for the launch, whether it's '23 or subsequently the next two years following that.

Okay, great. And then maybe one just on the P&L a little bit. You talked about capacity expansions in a couple of different places. We've obviously already built up a lot of that through the course of the pandemic on the legacy Quidel side, a lot of moving parts with China and general inflation and freight. So can you give us the latest and greatest thoughts on in a normal COVID environment, how that cost basis is changing in terms of where margins might be and where with some of these expansions, they may go relative to sort of the run rate we're looking at right now, that would be great.

Sure. Another good question, Andrew. I would say that our thinking is shaping over time. We've already said that like many others, COVID seems like it's moving into more of an endemic stage. If that's the case, and we don't see anything dramatic in terms of a big surge with that particular virus, it just becomes part of an overall respiratory offering. Whether we see rhinovirus infections, adeno, influenza, RSV, or whatever, including COVID, we're going to need that capacity, whether it's with QuickVue tests or with Sofia tests. Because remember, we're developing a menu for both, particularly with an emphasis on the Sofia menu. So we're going to need that capacity. On the other side, what we're suggesting is the demand for the slides for the Vitros systems have steadily increased. We're adding more manufacturing lines simply because the demand is there. The demand for instruments for a while now has been outstripping our ability to manufacture. We're working through those supply chain and manufacturing issues. But at the end of the day, all those things that we're suggesting we're needing to spend capital is because we think that we're going to need the additional volume. I hope that addresses your question.

Yeah. Andrew, I was just going to add just a further something Doug just said on the margins. And I think this is probably somewhere in the prepared remarks as well. Just to reiterate it, as we move into this endemic stage of COVID, which we think is going to be '23, but we don't really know. No one really knows. But we think it's going to be 2023. I do expect the margins on the COVID-related products will become closer to what the margins are on the rest of the respiratory panels.

Which is still quite good which means historically, remember, Andrew, we used to report on our robust respiratory season, flu margins in the mid- to high-70s in terms of gross margin. So yes, I don't really expect a significant margin impact as we move into the endemic stage.

Our next question is from Patrick Donnelly from Citi. Patrick, your line is open.

Thank you for the questions. Doug, I'd like to follow up on the Savanna piece. Are you suggesting that if the U.S. market is delayed, we will focus on increasing sales in Europe? Am I correct in interpreting that your $300 million guidance for the three-year period remains unchanged, just sourced from different markets? Additionally, regarding that $300 million guidance, I understand it won't follow a linear pattern. How should we approach this as we progress through '23, assuming there is a slight delay in the U.S. market?

Yes, Patrick, you're correct. We're considering an EUA clearance for the RVP 4, which is already available in Europe. At this point, being in the market towards the end of the respiratory season in the U.S. would be ideal, but it may be wiser to send those boxes and reagents to Europe so we can continue using the product throughout the respiratory season, capture the first quarter opportunity, and be prepared for a global launch in the fourth quarter of 2023. That's our rationale. And yes, we're not altering the target of over $300 million for the three-year period; we’re just adjusting where the product is being sent based on its availability. We won't need to allocate as much between the two major continents as we might have previously. Is there anything else you would like to add?

No.

Okay. No, that makes sense. That's helpful. And then, Joe, maybe one for you. You talked a little bit about kind of some of the instrument supply chain issues, obviously not alone on that front. But maybe just kind of talk about the magnitude and how we should think about what kind of headwind that is? And then the visibility into that normalizing, I think you said kind of throughout '23. So just how we should think about that piece, again, the impact on the top line? And then is that a margin headwind as well as you kind of work through it?

Sure. Most of the 600 unit backlog we discussed is related to the lab side of the business. Typically, about half of those placements involve reagent rentals, which we keep on our balance sheet, while the other half are cash sales. The margins on instrument sales are generally lower than those for reagents and consumables, so I don’t anticipate any impact on instrument revenue or margins. However, we estimate that if we were to resolve that 600-unit backlog, it could contribute an extra two points of growth for the full year. This is quite significant, and we are noticing improvements in the chip market. We have added new suppliers, though there are still challenges with other parts that occasionally fall short. Our global supply chain team is doing an excellent job keeping operations running smoothly. The backlog remains unchanged at the same level. While I don’t expect the 600 backlog to be completely resolved by the end of 2023, I do believe we will make substantial progress. We will likely provide more updates regarding the backlog as we enter 2023 and assess how much of it we can actually resolve during that year.

Our next question comes from Andrew Brackmann from William Blair. Andrew, your line is open.

Hey, guys. Good afternoon. Thanks for taking the questions and glad to be back on the call with you all. Maybe just first here, and I'll follow up with Patrick's question around '23, but you've sort of given crumbs over the last handful of months that point to sort of a high single-digit top line growth in '23 and call it EBITDA, $850 million to $900 million in next year. Not asking for specific guidance by any means, but I guess just at a high level, can you just sort of talk about some of the building blocks as we head into next year and whether those estimates are still in the ballpark? Thanks.

Yes, Andrew, it's Joe. Those estimates are indeed still relevant. Foreign exchange is definitely a challenge as we progress through 2022, and we are uncertain about its direction in 2023, but I anticipate it will continue to be a challenge next year as well. This will obviously affect the reported figures. However, from a constant currency standpoint, we remain optimistic about achieving high single-digit top line growth. This growth will be driven by various business units; the Labs business is expected to grow in the mid-single digits to high single digits. The point-of-care segment should see growth in the high single digits to low double digits. We anticipate solid growth in molecular due to the rollout of Savanna, and the transfusion medicine business is expected to grow in the mid-single digits. That's how we arrive at those numbers. Regarding EBITDA, we are still within the same range, and more details will follow as we conclude 2022 and begin to provide guidance for 2023 as we head into the new year.

Yeah. Well, first, welcome back, Andrew. What I would add, Joe, is that three months ago, we weren't as confident as we are now that we are going to see some level of respiratory season as we go into the end of the fourth quarter and into the first quarter, so that helps us with a little bit more confidence. We did raise the range on that as to what we thought a normal respiratory season would look like, particularly with influenza. So that's probably the only real change versus 90 days ago.

Okay, great. That's super helpful. And then Doug, maybe a crystal ball sort of question for you. But if you sort of go through the commentary of the other large IVD manufacturers and when you're talking about sort of endemic market numbers for COVID testing, you just add a few of them up and you get to a market that's probably $5 billion plus, pretty easy and endemic stage. Would just love your sort of thoughts around does that number sound right to you? And if so, how are you thinking about endemic markets here for Quidel moving forward? Has that changed at all heading into this respiratory season?

Yeah. I'll be honest with you, Andrew. I didn't add up all of this together to get the total. So I haven't really thought about it, but I will be responsible for our estimate, and I think our estimate is pretty reasonable.

Yeah, the $150 million to $200 million.

Yeah, I think that's conservative. It does not count anything from the government. It's mainly professional segment. I think there will be a move away from asymptomatic testing, and that part is probably going to go away. So I don't know how much asymptomatic testing would have been modeled in these other companies' estimates. We're not counting on a lot of asymptomatic testing. We're counting on a respiratory season that creates disease and creates the need for people to want to know, whether that's at the doctor's office or on their own at retail.

Yeah. And again, I'll reiterate what we said earlier, we expect once we do get into that endemic stage, for us, it's just a respiratory season whether it's COVID or flu or RSV, part of the respiratory panel.

We faced a challenge with costs, and I believe the public is now more inclined than ever to get tested to understand their health status.

Our next question is from Alex Nowak from Craig-Hallum. Alex, your line is open.

Good afternoon, everyone. I wanted to continue our discussion on respiratory issues. It's been some time since we experienced a flu season, and we might be entering the respiratory season now with flu, RSV, and COVID circulating. When you speak with distributors and customers, I'm interested in how they are preparing, what their inventory levels are, and what their plans are for managing fevers and coughs in terms of testing for flu, COVID, or a combination of both.

Yeah. We are getting pinged, Alex, from distribution. In the quarter, we saw two times what we normally were in terms of orders from distribution on RSV. Flu was more like what we would have seen in years prior to COVID, with the exception that there are simply more boxes. So there's more customers ordering. It's hard to forecast now because you've been covering it for a long time. It's hard to forecast not only the intensity of the season but the duration. That's one of the bigger variables; it's just so hard to predict. But at the end of the day, what would you add, Joe?

I would just add that this flu season started a bit earlier than expected. The charts show that it began earlier. However, we are unsure about the duration of this flu season. While we have data points from Australia, we cannot determine if they will correlate exactly.

That's correct. I want to mention something you’re already aware of, Alex. When we examine the combination opportunity, we're in a situation around the fourth quarter where customers have ordered a significant amount of the combination product, but the flu is currently not widespread. This leads to a scenario where our predictive ability in a low-prevalence situation results in physicians experiencing more false positives, which is problematic. The mix we observe will also largely depend on the prevalence of flu compared to other respiratory pathogens we may encounter. I know you're familiar with this, I'm just reiterating it.

Operator, we have time for one question.

Okay. Our final question is from Casey Woodring from JPMorgan. Casey, your line is open.

Hi, guys. Thanks for squeezing me in. I guess my question is just can you elaborate a little on why exactly the Savanna U.S. launch is seemingly being pushed out here again. Why is that EUA pathway for approval now closed? Is the FDA still backlogged due to COVID? Or is there something else going on there? Thanks.

We are actively pursuing discussions and while I can't say we have complete confidence in the EUA pathway for point of care or mod complex, we are having various conversations about the additional data required to reassure the FDA about moving forward. Since certainty is not guaranteed, we are reallocating some boxes that we initially planned to ship to the U.S. to Europe, where demand has been higher. Nonetheless, I am making 100 boxes available to U.S. customers in the next couple of months to begin our typical launch activities. We are not slowing down the U.S. launch, but we recognize that if we delay too long into the first quarter, we risk missing the respiratory season in the U.S. I appreciate all the thoughtful questions. In closing, our first full quarter as a combined company boosts our confidence in our strategic priorities and long-term financial results. This strong third quarter demonstrates the teamwork, agility, and overall performance of our team, bolstered by our robust product portfolio and expanded global presence. The integration is surpassing expectations, and our employees are collaborating more effectively than we anticipated. On behalf of our team, thank you for your ongoing support of QuidelOrtho. Lastly, our Investor Day is scheduled for December 13 in New York. If you haven't received an invitation and would like one, please contact Bryan, and we'll do our best to accommodate you. Thank you, and have a great day.

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