Conference Transcript - QDEL 2026-06-03

Tycho Peterson, Analyst — Life Science team

Okay, we're going to kick it off. I'm Tycho Peterson from the Life Science Team. It's my pleasure to introduce Coidel Ortho. So why don't we jump into it, Brian? Maybe just starting with a quick look back on some of the gives and takes on 1Q, a number of moving pieces there between flu, Middle East, China distributor stocking. Maybe just talk a little bit about where these stand and how we should think about momentum coming out of the quarter.

Brian Blaser, CEO

Yeah, thanks, Tycho. It's good to be here with all of you this morning. You know, maybe I'll just start with a bit of a reflection on the company a couple of years after joining. You know, Quidel Ortho is really kind of a vastly different company than it was when I joined the business two years ago. We have implemented significant streamlining of the organization. We've taken over 900 positions out of the business, implemented over $140 million of cost savings. We'll deliver another $30 to $40 million this year. And we have assembled a, I think, just an amazing leadership team with significant changes across the board in HR, R&D, quality, regulatory, operations, commercial, and, you know, really have set the foundation for, you know, significant growth and profitability in the business. You know, I think as we reflect back to Q1 specifically to your question, you know, I was surprised by a couple of things. in the quarter. You know, first, we had a really strong start to the respiratory season at the end of the year, and then just a, you know, complete drop-off. So, ILI visits were down 30%, so that, you know, that happens occasionally, but, you know, as we've looked historically back over time, every time we've had a significant, significantly lower Q1, generally speaking, the year more than fully recovers and we've been pretty cautious with our guide we're forecasting that our respiratory business will be down eight percent for the year but you know I think that the good thing is that there's nothing underpinning the structure structural nature of the respiratory business that that I'm concerned about we did extensive work with our KOLs understand, you know, have testing patterns changed, have protocols changed, and all of that remains intact. So, you know, no concerns there. I think the other thing that was surprising was the pivot by the Chinese government toward a broad-based reimbursement change. You know, there were some rumbles about a volume-based procurement process that would affect dry chemistry strips that suddenly pivoted we got a little bit of a head fake there and it pivoted to this this broader reimbursement change that really is eliminating differential pricing for differentiated technologies which is going to affect our dry slide chemistry business so we're we're still waiting for the final rule here to be defined and hopefully that will come out the end of June. But aside from those two factors, the underlying business is really performing quite well. Our labs and immunohematology businesses are very stable, solid mid-single digit growth businesses with very long contracts, high win rates, high retention rates on existing business. And so we have a lot of visibility and predictability in those businesses. And they continue to perform well.

Tycho Peterson, Analyst — Life Science team

And maybe just hitting on China for a minute, because you saw sales to distributors slow in March ahead of, you know, the expected pricing declines. I think you've incorporated a $30 million headwind for the year. Can you maybe just talk about how much you saw in the first quarter, what you're expecting in the second quarter, and then, you know, any signs of a pickup that could lead to a recovery in the back half of the year?

Brian Blaser, CEO

Yeah, it was in the range of 10 to 15. And, you know, I think we'll see some more of that in Q2, which is included in our guide. And we do expect distributor sales to pick up toward the back half of the year as they, you know, continue to need to order and replenish inventory. So I am expecting China to return to, you know, low growth in the second half of the year.

Tycho Peterson, Analyst — Life Science team

And then, you know, I think one of the other questions we got a lot coming out of the quarter was just on the Middle East. I think you've said $5 million to $10 million, you know, going from the first half to the second half as things, you know, normalized. What's the level of visibility on, you know, those orders, and is there any risk it could slip into 27 if things persist?

Brian Blaser, CEO

No, I don't expect it to slip into 27. We're already seeing signs that that should return in the second half of the year, and it was really relatively immaterial. It's like less than $5 million worth of tenders and orders that were delayed. Some of them delayed just because of issues with shipping routes that were impacted at the time, and others were just, you know, uncertainty around tenders. And so we're already seeing signs that those will return in the second half of the year.

Tycho Peterson, Analyst — Life Science team

And maybe can you just touch on some of the other drivers for an acceleration, you know, in growth in the back half of the year? Obviously, there's an extra selling week in the fourth quarter. You've got, you know, new product launches, potential Lex contributions. Maybe just, you know, help us with the bridge to the back half of the year.

Brian Blaser, CEO

Yeah, you know, historically, the second half of the year is always our historical highest, and the first half is our historical lowest. And the second quarter in particular is our lowest in terms of sales, adjusted EBITDA, and cash flow. And so we do expect that cash flow will be negative for the first half of the year. And as we move into the second half, sales will accelerate just as part of the historical ordering pattern. But we have a couple of really good things going on that I think are solidifying our position for the back half of the year. We have the Vitros 450 and Vitros ECL launch outside the United States, which is a – basically, it's a – we have the 450 as a clinical chemistry analyzer combined with the ECL, which is an immunoassay analyzer, that are targeted for low-cost, conscious markets. and markets where we have historically not been able to play because we lacked the full menu to do so. And so that, combined with our high-sensitive proponent launch in the U.S., which is really taking off, we've got several hundred customers now that have converted over to high-sensitive proponent, that's kind of a game-changer for us in the hospital market in the U.S. And then we haven't included a lot of impact this year for Lex, which we're now calling New Lexa, but we expect to place a few hundred instruments in the back half of the year and then be able to roll into 2027 and position ourselves nicely for the 27-28 respiratory season. So a lot of growth drivers in the business for the back half of the year and, you know, looking forward to really charging into 2027 as well.

Tycho Peterson, Analyst — Life Science team

You know, the other dynamic is there's a decent margin step up implied as well, you know, to get to 23 percent for the year from 17, 18 percent in the first half.

Brian Blaser, CEO

Maybe just, you know, can you unpack how much of that is fixed cost leverage, you know, with the improving top line versus product mix versus some of the, you know, cost outs? maybe just give us a bridge there on some of the moving pieces so there's a couple of things there first of all we have our donor screening business is being unwound so we get the advantage of that in the back half of the year and again as our our sales expand in the back half of the year we take advantage of the expanded EBITDA margins there in addition you know we're continuing to drive additional incremental cost savings in the business so we've got 30 to 40 million dollars of incremental cost savings associated with direct and indirect procurement projects that will be implemented and taking effect this year and as well we're going to be doing some additional target targeted staffing reductions that will expand our margins so think about a you know for the full year it'll be about a hundred basis point improvement in in margin year over year And now I guess are there additional levers that you flagged if the top line doesn't come back to get you to 23%?

Tycho Peterson, Analyst — Life Science team

Yeah, I mean we you know we always have levers and plan B's that we can implement if we need to at this point I don't I don't anticipate needing to have to you know bring those into play Maybe we can jump into the businesses then you know lab in near term you talked about vitro's 450 I guess, you know, just maybe talk a little bit about how much of the recovery that you're anticipating here as market, you know, pickup and, you know, areas outside of China. I think Latin America, you know, has been an area you've had a little more focus on Yeah.

Brian Blaser, CEO

If you look at Q1, our Q1 performance for labs, if you exclude the China impact and the impact of our Griffils settlement, which impacted the top line but is actually favorable for us on the bottom line, we grew about 1%. And that was against a very difficult comp in 2025, where I think we grew about 7% in the quarter in 2025, which is a lot for a Q1 for us. So our underlying labs business continues to perform very well. And I would say LATAM and countries outside of China in Asia Pacific, we continue to be be very under-penetrated there, and those are good opportunities for us in EMEA, LATAM, and those Asia-packed countries, not including China. And so we do have a focus on additional penetration there, as well as over-indexing on our immunoassay penetration with our integrated systems, where, again, we're kind of under-penetrated relative to the rest of the industry. So, you know, I think those factors, again, kind of help this acceleration into the back half of the year.

Tycho Peterson, Analyst — Life Science team

And I guess just thinking a little bit longer term, I mean, we tend to think about kind of the core lab market, mid-single-digit, steady-eddy growth. As you highlighted, you're, you know, over-indexing on immunoassay. You've got, you know, high-sensitivity troponin, Lifetronic. Could you kind of be in a position to outgrow the underlying market here for the next couple of years?

Brian Blaser, CEO

I think the way I think of it is that these new products, the 450 ECLs, some of our new flexible automation and informatics solutions, you know, these are high-sensitive troponin. These are things that really help us support the underlying mid-single-digit growth of this business over the long term. I think what gets us excited about projecting into the mid-to-high single digits are new systems which we are we've initiated development of and so i think you know those are a little further out but you know i think solid mid single digit in the near future with the opportunity to go higher as we we think about new systems over the long run could those be in the next three to five years is that kind of the right time that's kind of the right time time frame to think of that uh and then you know point of care we we touched on respiratory um you know i i guess you talk a little bit about what you're expecting in 2Q specifically for respiratory, and then as we think about the rest of the year, you know, any read-throughs you're seeing from early data,

Tycho Peterson, Analyst — Life Science team

Southern Hemisphere?

Brian Blaser, CEO

Yeah, you know, I think it's still a little bit early to think, to look at the Southern Hemisphere data. I've seen some data that shows flu cases, you know, kind of down, but I've also seen data that shows ILI visits kind of tracking in line with 2025's numbers. that could just be timing at this point because we're kind of right at the start of when flu season happens in the southern hemisphere so I think we're just a little bit too early to draw any conclusions about what's going to happen the back half of this year but historically as I said as we've looked back pre-pandemic typically you do have a pretty good recovery in the back half of the year where you've had a down season in Q1

Tycho Peterson, Analyst — Life Science team

And then just maybe thinking about the contours of demand for point of care ex-respiratory. I think triage, you know, last year was up high single digit. Is that doable again this year?

Brian Blaser, CEO

Yeah, triage, we were impacted a little bit with triage by the China situation. I would expect that to abate the rest of the business. Triage is a great grower for us in the U.S., as well as EMEA and LATAM, and that business is growing in the high single digits. So, you know, I expect some recovery in China toward the back half of the year as things normalize there and, you know, continue to drive great growth with the triage platform.

Tycho Peterson, Analyst — Life Science team

And thinking just longer term on point of care, you know, now guiding down 8%, you know, it's been down double digits in the last three years. I guess flu severity will, you know, always be a factor, but is there anything in your control you can do to get this segment back to longer-term growth?

Brian Blaser, CEO

Yeah, so, you know, our biggest asset for point-of-care is our large install base of instruments, SOFIA, Triage, soon-to-be Nulexa. And so we're very focused on taking advantage of that install base in terms of new content. And so we're looking at adding sort of non-respiratory assays to SOFIA, like infectious mono, H. pylori, C. diff, norovirus. In addition, we're looking at high-sensitive proponent application for triage in the U.S., some opportunities for us to look at sepsis, as well as a number of toxicology assays. And then Lex, you know, I'm very excited about that platform. In addition to the flu AB, SARS combo, we're going to be doing a fast follow with strep A followed by RSV. So, you know, those are all opportunities for us to elevate the growth profile of the respiratory business beyond, you know, just the respiratory season and the volatility there.

Tycho Peterson, Analyst — Life Science team

And maybe just double-clicking on Lex, you know, now that the deal's complete, interesting, you know, piece of technology. Obviously, backfills, you're entering into molecular, you know, after the Savannah R&D project was shelved. But maybe just talk a little bit about why this deal was so compelling for you guys and, you know, what it brings to the portfolio. And then how are you thinking about timelines for some of the men you build out you just mentioned?

Brian Blaser, CEO

Yeah, I mean, the deal was compelling because it was an opportunity for us to make an investment and limit our risk at the same time. time and get into a technology at an attractive price, frankly. And so the assay was approved last year. At the time we were making our decision around Savannah, we had seen the clinical data and realized that the pivot toward Lex, I think, was a better strategic alternative for the business. And we went ahead and made that pivot. we've completed the acquisition of the business at this point we're looking at ramping that as quickly as we can I'm excited about the the demand for the product at this point we've gone from the thought of placing a couple hundred units this year to placing a few hundred units and honestly I could probably place a thousand but I'm trying to modulate the the cash flow impact of doing so and I think you know my biggest concern is is being more supply constrained there than demand constrained and we're doing a lot of things to ramp up our production in Cambridge in the UK for our assays as well as our instruments with the idea of being that we place a significant number of these instruments in 2027 in preparation for the 27 28 respiratory season and are able to take advantage of that. I do see this over time as being a several hundred million dollar opportunity for the company and generating molecular-like margins over time. I think it will be dilutive probably through 2027, but my view would be that it should be accretive to the profile of the business exiting 2028 for sure.

Tycho Peterson, Analyst — Life Science team

And I guess just in terms of the initial expectations and potentially, you know, upside from a demand perspective? Anything you can kind of point to in terms of geography, you know, customer size, profile?

Brian Blaser, CEO

The typical customer for this is, this is a point of care instrument. And what's great about it is that in almost every case, you have a Savannah platform that has a molecular competitive instrument right next to it. And it's an opportunity for us to go in and sell kind of a combined value proposition. And, you know, the great thing about Nulexa is not only its speed and workflow, it's a, you know, completely sample and answer out workflow, which compares to a lot of the competitive instruments that have a very cumbersome and long workflow. So, you know, up to 30 minutes in the case of some of our competitors and many, many interventions that have to take place at certain time points. in performing the assay, we don't have to do that. So 6 to 10 minutes versus, you know, 20 to 30 minutes of total hands-on time. And the economics for new Lexa are really compelling from a customer standpoint. So you can think of, you know, one of our competitors probably, they have to run two assays because they don't have a combo test. Think of that as costing in the $80 to $100 for that customer with a reimbursement of $155, whereas we'll be in the, let's say, $40 to $60 price range with $180 reimbursement with one test that's performed with much easier workflow and a faster result. So we're really excited about the potential here and the opportunity for us to go in and utilize our existing SOFIA base to provide an overall solution for our customers.

Tycho Peterson, Analyst — Life Science team

And how should we think about the potential step function and growth, you know, as you kind of fully commercialize it, you know, more broadly in 27? And you've been in diagnostics a long time. Any good historical analogs, you know, that could help us contextualize what this?

Brian Blaser, CEO

Yeah, you know, I don't know. I took a look at some of the competitive placements. A lot of our competitors placed units and did a lot of their placement growth during COVID. There's been some recent competitors out there, but they're more geared toward the professional segment as opposed to point of care. So I don't have a good analog to share with you. But needless to say, I think, again, we're going to be more concerned about having enough to supply and, again, balancing that with cash flow in the business to be able to support it over time.

Tycho Peterson, Analyst — Life Science team

And you talked about above corporate margins at some point in 27. Any ceiling you can kind of point to on the margin profile after balancing higher margins with pricing and R&D?

Brian Blaser, CEO

Yeah, I mean, just generally speaking, they will be above our average, you know, historical margin profile. You know, typically molecular level margins are in the 60 to 70 percent gross margin, you know, range is the way to think of it.

Tycho Peterson, Analyst — Life Science team

And then I guess you mentioned the menu build out, just timelines for full menu and, you know, anticipated pull through, you know, once you have a full menu.

Brian Blaser, CEO

Yeah, you know, actually I'm not too concerned about the menu because really the workhorse assay is the flu-SARS combo test. I mean, that's the majority of the testing that happens during the respiratory season. And we're going to be able to provide a really compelling value proposition, as I just described, you know, right out of the gate. But again, going back to the menu, we just got a hold of the business here in the last couple of months. We're working with the team to put together timelines for a strep A assay followed by an RSV assay as quickly as we, you know, practically can. And, you know, we'll probably share some more visibility around that, you know, as we get further down the road with the business.

Tycho Peterson, Analyst — Life Science team

I want to maybe go back to China for a second. I know we, you know, talked on it a bit earlier. You know, a couple questions that we've gotten are just, you know, what's going to happen in the next 12 to 18 months, you know, with policies like VBP. You know, you talked about that in January. You have a more recent NHSA policy. So maybe help us level set on the status of these two policies as you know them today and the expected timing of the impact.

Brian Blaser, CEO

Yeah, so as I described, the Chinese government has pivoted toward this broad-based reimbursement change. And it's going to impact roughly half of our business in China. It mainly impacts our dry slide chemistry tests in China, which is about half of our business. And based on the initial rule that came out, we're expecting probably at the end of the day about a 30% to 40% impact on our pricing in the market. And where they are in the implementation with that is they originally were going to implement it in April. Then it got pushed out to May and now June. There's been a lot of lobbying by KOLs, hospital groups, industry groups, to try to modify this policy because it wasn't greeted favorably, just put it that way. So at this point, we think that it's going to be rolled out or published sometime in the June timeframe. it's our understanding that they will pilot this process in three provinces and there's going to be a process where they have to match literally like four to six thousand codes into several hundred codes and I think that's going to be a bit of a political process because everyone's going to be trying to get their, you know, codes matched to the highest reimbursed codes in the new set of codes. And so I think they're going to go through a bit of a process to do that. Our planning assumption is that they'll do the pilot in the back half of this year. And then in 2027, they'll roll out the rest of this to the other provinces. And again, we're planning that they'd be fully rolled out by the middle of next year. If you look at some precedents for how this has been done historically, you know that might be accelerated because some of these things have taken years to to you know implement but we're planning it's going to probably happen in in that time period um that that's good because it gives us some time to respond uh you know our our china business has historically been uh staffed for a lot of growth um you know we're looking at how we're going to adjust our go-to-market model in China as, you know, in response to this, to offset some of the costs. And we'll probably have to do some other things across the business, but we're already, you know, underway and looking at how we can fully offset the impact of this. I think that the way I'm looking at this is it's kind of a one-time reset of our China business. But, you know, even after this change is made, our margins in China are accretive to the average margin profile for our business. So it remains a good business. It's not going to be as high growth business as it used to be. And we'll have to approach it a little bit more cautiously. But again, I kind of view it as a one-time reset at this point.

Tycho Peterson, Analyst — Life Science team

And then you sort of alluded to this, but how quickly could you reset your cost base there? And would that come with a big reprioritization strategically, you know, that region?

Brian Blaser, CEO

I think, again, we're going to be looking at taking cost structure actions to offset this. We're already well down the road and working on that and moving swiftly there.

Tycho Peterson, Analyst — Life Science team

Another big topic for investors has been free cash flow. I think we should spend a minute on that. A number of moving pieces, getting better here. It was in early 25, and then you had a couple of rough quarters.

Brian Blaser, CEO

I guess you had the ERP conversion uh that impacted it as well but maybe just at a higher level talk about you know the roadblocks going forward uh to the extent they're still there on uh free cash flow improvement yeah so i mean free cash flow improvement is a central focus of the company we have we have aligned um our management teams and in fact our entire company bonus structure uh has a an element of improving cash flow, so all of our compensation is, you know, tied to making this a priority. You know, I would say we've made some good progress here over the last couple of years, but we have been cash flow negative for the last two years that I've been here, and I think the year before that prior, and this year, you know, our guidance is that we will move to 100 to 120 million of positive free cash flow for 2026. And, you know, typically what you see, you saw in the first quarter were negative cash flow, will be negative cash flow again in Q2. That's our kind of our historic pattern. But as our sales and margin expand through the back half of the year, and as we start to put some of these ERP conversion costs, integration costs, the costs for the organizational right-sizing, et cetera, behind us, and we deliver on our incremental $30 to $40 million of procurement savings, those will all kick in to propel us toward that cash flow goal. I would also say that we have a huge focus on every aspect of our cash conversion cycle, So inventory, accounts receivable, payables, you know, we're looking at probably 15 to 20 days of improvement in inventories this year, which will all help us achieve that, you know, 10 to 20, I'm sorry, 100 to 120 million dollars of cash flow by the end of this year.

Tycho Peterson, Analyst — Life Science team

And you're still targeting, I think, over 50% conversion in the back half of 27. I guess just to some of the initiatives you mentioned, how much of that comes from one-time benefits from site consolidation, procurement versus more sustainable items like lowering CapEx and reducing working capital drag like the days reduction you mentioned?

Brian Blaser, CEO

So the way I look at it is it's roughly half. So a lot of it is the improvement in the cost structure, expanded sales and EBITDA, and then, again, the significant focus on working capital, CapEx. We're being very sort of balanced in our approach to adjustment in CapEx. We're not doing, this is not a pay me now, pay me later sort of thing, so we're looking at sustainable changes that we can make to every aspect of our working capital and CapEx across the business.

Tycho Peterson, Analyst — Life Science team

And maybe just in the last minute, thinking about what's overlooked in the story today, I mean, 26 is a lot of one-time items, as we talked about, 27 potentially, some overhang with the China policy, but then you have a solidly growing lab franchise, you're adding new growth vectors, with Lex in particular. Just talk about elements of the story you think people are overlooking today.

Brian Blaser, CEO

Yeah, I think there's been a lot of focus on the respiratory season and China, but what people miss is the underlying strength and growth of our labs and immunohematology business, which are 75% of the company, which are performing quite well and are very healthy. We're investing now in a very focused way in innovation. We're starting to see the fruits of that come to bear in terms of Hisense Troponin, in terms of some of these platform launches with the 450, ECL, etc., some of our new automation solutions. So, you know, the underlying business is performing really quite well. And I think, you know, the other thing people should understand is that we are very focused on delevering the company. You know, we're at 4x now. We expect to be a 4.1, rather. we expect to be around four at the end of the year this year and then around three and a half middle of next year and me and the board are very focused on looking at every corner of the business to deliver the business as quickly as we can I think those are things that investors need to consider Great, we'll leave it at that