Ladies and gentlemen, thank you for standing by. Welcome to the Quidel Corporation Third Quarter 2021 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Ruben Argueta, Quidel Director of Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone and thank you for joining today’s call. With me today is our President and Chief Executive Officer, Doug Bryant; our Chief Financial Officer, Randy Steward; and our VP of Finance, Kristin Caltrider. Our third quarter 2021 earnings release is now available on ir.quidel.com, our Investor Relations website. We will also post our prepared remarks on the Presentations tab of our IR website following the conclusion of this call on November 4, 2021 for a period of 24 hours. Please note that some of the information we provide today during today’s conference call constitutes forward-looking statements. Forward-looking statements, by their nature, involve material risks, assumptions and uncertainty. In particular, our expectations and assumptions around the impact of COVID-19 pandemic on our business, results of operations and financial condition and that of our suppliers, customers and other business partners are highly uncertain, continuously evolving and unpredictable. Actual results may differ materially from the forward-looking statements due to various important factors, including the risk factors discussed in our most recent 10-K and subsequent periodic reports and registration statements filed with the SEC. Furthermore, this conference call contains time-sensitive information that is accurate only as of today. Except as required by law, we undertake no obligation to update these forward-looking statements or time-sensitive information, which speak only as of today. Today, Quidel released financial results for the 3 and 9 months ended September 30, 2021. If you have not received our earnings release or if you would like to be added to the company’s distribution list please contact me at 858-646-8023. Following Doug’s comments, Randy will briefly discuss our financial results, then we will open the call to take your questions. I’ll now hand the call over to Doug for his comments.

Thank you, Ruben, and welcome to everyone on the call. We really appreciate your time and your interest in Quidel. I want to start by recognizing the entire Quidel team for their commitment to their teammates and communities. We started the pandemic with both grave uncertainty and the label of essential workers. We have all been affected as well as bonded by it, because of our culture, that pressure only motivated us to lead the industry’s response to the pandemic, to develop new assays, drive discoveries on new platforms, manufacture at unprecedented scale and keep that production going despite supply chain challenges and concerns over the rapidly changing environment. Our team did it all despite personal and family concerns in long hours day and night. Their efforts have been heroic and their impact on this country has been lifesaving on a level that can never be fully charted. While others bought, we never wavered, but what our people have done for our company can be measured at least in part, because what we are discussing today only boils down to the results from a single quarter. Let’s step back for a moment and consider. The U.S. has weathered several COVID spikes. Our Quidel teams have been asked by our country to do and have done what was previously considered impossible to go from 0 to 60 in multiple categories of COVID diagnostics and take those innovations to scale at lightning speed. In the process, Quidel has transformed into an enterprise that is far more than essential. We are purposeful. We have delivered on our foundational purpose of advancing diagnostics to improve human health when it really counts. And that is a far more important metric to our Quidel family than any numbers we have discussed today. Nevertheless, the numbers reflect…

Thank you, Doug and good afternoon everyone. As Doug stated, we had a great quarter and we made and continue to make steady progress on our longer term goals. As reported, total revenues for the third quarter of 2021 were $509.7 million compared to $476.1 million in the third quarter of 2020, achieving growth of 7% year-over-year, largely due to increased COVID-19 testing demand related to the Delta variant. Foreign currency exchange had a positive impact of $1 million in the quarter. The increase in total revenue was due to strong demand for all of our COVID products, especially our visually-read QuickVue at-home OTC COVID-19 test, which received EUA late in the first quarter of this year. This sudden and sustained demand for at-home testing in the quarter resulted in a shift in SARS product mix related to the third quarter of 2020 when we were only authorized to sell Sofia SARS antigen test in the professional segment. In effect, we started selling Sofia rapid antigen test in the professional segment in the high-teens price point. And today, we are selling them the professional segment in the low-teens and selling QuickVue tests to pharmacies, schools, employers and government agencies in the mid single-digits. Total SARS revenue in the quarter from all products was $402.6 million and this compares to $375.7 million in the quarter last year, a growth of 7% year-over-year. In total, we sold over 45 million COVID tests in the quarter. Approximately, $24 million of those were QuickVue and 16 million tests of Sofia. Influenza revenue in the quarter was $13.8 million versus $9.0 million in the third quarter of last year. Included in this influenza revenue number for the quarter was $4.3 million in the Sofia ABC revenue. This combo product was not yet available in the…

Thank you. [Operator Instructions] The first question is from Alex Nowak with Craig-Hallum. You may proceed.

Hi, everyone. This is Trenor for Alex Novak. How are you doing? Now that Delta is waning a bit here, are you starting to see COVID testing normalize heading into Q4 or is it still at elevated levels? And with new variants constantly in the headlines, do you think a higher floor could be forming as COVID testing becomes a natural part of respiratory seasons? I guess, in other words, while I understand it’s hard to pinpoint an exact floor, but do you think that $20 million to $25 million per month is the appropriate floor going forward?

Questions. First, with the decline in infection rate, I think it’s pretty much our expectation that we will see lower and softening demand for COVID testing across all manufacturers in the professional segment. At the same time, though, testing for asymptomatic individuals remains still very, very high across employer, schools, retail governments as well as ex U.S. So it’s very difficult to know what will happen. But I would say that the $25 million floor was a level that we were seeing prior to the delta variant. Could it be higher? I suspect so. At the same time, we also have the government order. So it’s hard to predict how much of the floor is influencing that one, we’re going to far exceed that at least in the next few quarters, not just with the government, but also with the employers that we will now be able to take on board. Schools, if indeed that does continue to develop. And obviously, there is a retail component that we’ve been struggling to serve across all of the sites throughout the United States. So that’s sort of the overview of what’s happening out there. I think I could safely say that we have a 2022 that looks fairly significant terms of COVID revenues. That will be helpful, I think, gives us a little bit of a bridge as we launched Savanna, which is going to take obviously little bit of effort as we manufacture more cartridges and instruments and roll it out ex U.S. and then here in the U.S. So I hate to say it, but there is a decline in infections, but I don’t think it’s going to cause a big difference in testing at least for the next few quarters.

Got it. Okay. And then if I could ask one more question here. Of the 700-plus thousand Sofia installed base that you have, how many of these systems are still primarily being used for COVID? And are you starting to see utilization trend higher for other non-COVID assays? And I guess like from a priorities perspective, what is next in the pipeline beyond COVID, you had to rank them?

First, it’s true that a large number of those placements occurred during the initial pandemic. We continue to place, but it’s also true that many of those, I think, about three quarters or more included agreements to purchase influenza, Strep, RSV and other products. So, assuming those infectious diseases continue to be prevalent here in the U.S. as well as ex-U.S., I think that we will do still reasonably well, even when the volume does fall up because imagine that if indeed we go from pandemic level testing globally to endemic throughout regions of the globe that during those periods of endemic disease, we won’t know whether it’s influenza or whether it’s COVID. And so I suspect that we will see syndromic panels whether they are small panels like you would see on Sofia or larger panels like you would see in Savanna. So I think the syndromic panels moving forward are going to include COVID. And what was the second part of your question? I apologize.

Yes. Just...

Yes, we’ve got a number of things that we’re looking at. I like the toxicology space, a great deal. I think the technology that we’re developing now will be suitable to that to a higher multiplex toxicology panel or more. And I also think that the allergy panel, particularly when you think about regional allergy panels and the flexibility that we might have to both develop those panels, but also manufacture for people who live in the South are people who live in the it East or people who live in Japan etcetera, the allergies that they are going to be experiencing as a result of different things loading in the air, right? So I like those two in particular. There are others that I probably should talk about on the call here given what I see as a large number of competitors listening in. But we have a number of opportunities. I think that our R&D team is going to be super busy over the next couple of years.

Alright. Great.

Thank you.

Thank you, Mr. Nowak. The next question is from Brian Weinstein from William Blair. You may proceed.

Hi, good afternoon. This is Griffin on for Brian. Thanks for taking my questions. Just first to clarify on the government contract minimum used to be at just about $284 million as you said, is the minimum now updated as the government communicated to you at the moment is now updated in that $500 million contract? And then can you tell us how much, if any of those fourth quarter – excuse me, third quarter COVID revs were part of the contract – sorry, just on the $500 million minimum?

Reverse – yes. Let’s just go and think in reverse order. We didn’t ship anything in Q3 related to government orders. Everything you saw there was mainly retail mainly professional segment and some employer testing and some school testing. So no government testing there. Just to the order that we have for them isn’t specifically on the minimum, it’s more of a range. And so I wouldn’t bake the number into your model sort of anticipating why you’re asking me that question. But I would say that the discussions that we’ve had with HHS, DoD and others strongly suggests that they are interested in fulfilling that contract. And the discussions really have been more around the timing and in which quarters, and we’ve actually been arguing for delaying a little bit because we’re struggling to fulfill some of our large employer orders. And we have a pretty significant number of employers that have requested testing that we’ve been pushing out into Q1. So I would say the government has been super flexible with us, and we appreciate it greatly. We think that we can get all caught up as we exit this year, move into Q1 and then start fulfilling some of those orders, some of which we do have a pretty nice idea of what we’re going to be expected to deliver, but we probably won’t complete those government orders until around September 4.

Great. Thank you. And then just one on M&A and you talked about $800 million of cash exiting the year. It’s been a topic of discussion for a little while. Would you say that it’s the quality of assets or more valuation that is a sticking point here?

I think for us, it’s about strategic fit. It’s about having products that set our commercial team across the globe. And we are not interested so much at least at this time and things that are too far away from commercialization or where revenues are low, the costs are high and there is not a lot of EBITDA. In fact, there is just no E. So, we are less interested than that, because I just think that it just pulls us down. It’s not super helpful in a short return. So, we are looking at things that are tuck-ins, but also we are looking at a couple of things that are a bit larger. So again, for us, its strategic fit and I have said many, many times to our existing investors that we promise to try very hard enough to do something done.

Okay. Thank you.

Thank you, Mr. Soriano. The next question is from Casey Woodring with JPMorgan. You may proceed.

Hi Casey.

Hi guys. This is Casey on for Tycho Peterson. First question is kind of a broad one on what gives you confidence that this sort of employer demand that you are seeing now that’s going to sustain throughout next year, does this sort of vaccine or test once a week in the workplace going to last the entire year next year? And yes, any sort of color around employer demand trends?

Well, the Biden plan in particular, obviously, to a lot of employers to do that. The recent posted guidelines are helpful in that regard. Not just us, but across the board, other manufacturers, not just the ones who are doing rapid antigen also goes to doing pooled PCR testing, all sorts of things. And just a number of case of people that are approaching us and because of the scarcity of supply, which hopefully, that will be a little bit, but because of the scarcity of supply right now, people are interested in making a commitment to us. Originally, we were asking for 12 months purchase orders or more – or being a little bit more flexible now because the world is uncertain. And so I would say most of the folks that we are talking about are firmly committed to giving us the number for the next six months, which is helpful because from a planning perspective. Are we making a lot of flu or strep for RFP, can we do that during periods of time, or do we have to devote a very, very high percentage of our manufacturing capacity, just to exclusively COVID or COVID/flu combo, that sort of thing. So, in terms of an understanding of what to make and what SKU and which size, is it a one test, that is two tests, is it a five test, is it a 10 test. We have a 25 test now and understanding of what, each of the individual employers who are large, but they all are a little bit different in terms of how they want to deploy the test and so the packaging sometimes is a little bit different. So, an understanding case, you have exactly what we need to deliver. If we have that sort of certainty, it certainly would make our lives easier, that’s for sure. But it’s good. It could abate, it could soften. People can make different changes, but at the same time, we also have an ex-U.S. component, which we can’t get to at all right now. And in fact, we promised the government that we wouldn’t until we fulfill their orders. So, right now, we are pushing off or I shouldn’t say that way, we have asked politely HHS and BOD to have a more flexible delivery schedule so that we can address some of the employers, and I just don’t know that that’s going to go away anytime soon. So, in nutshell, I think 2022 is probably likely to be fairly significant for us still as we move from this pandemic situation into something that’s more traditionally endemic.

Got it. Can you please remind us what your current manufacturing run rate is now as we sit here first week in November and then what it would be beginning in 2022? And then just on the government order, it sounded like it was for 100 million tests, so ASP is around $5. Can you talk about the margin profile of that test and…?

Yes. First, and I am not as good as some others on the multipart questions, so I will try a little hard here. The price and the government agreement is 5.50. So, the margin profile is still quite attractive, right. And so there is room as we compete moving forward, more competitive entrants. Do we have the ability to lower the price as we do. At the same time, we are ramping up manufacturing capacity. And I would say that our overhead in our original facility, McKellar, which manufactures now how much exclusively. So, be a product. That overhead is very similar to the new facility, even though a big chunk, a big percentage of the cost is the depreciation of that capital equipment. So, even with that, we have got a large depreciation expense. Even with that expense, the two look very similar. So, we are not really in a period of time where we are worried about factory absorption. The other thing that obviously you would, well to the high case is that depreciation expense is non-cash. So, it has no impact on our cash position. And so it’s actually better from a cash perspective, these products that we are manufacturing there now. As we exit the year, we are not in a position where we could confidently say according to my Head of Operations just the other day, that we are going to exit the year at reflect, at right around maybe plus or minus, but we should be right at about 50 million tests per month. And on the Sofia side, or even – or I would just say we are equally confident that we are going to be at the 20 million per month range. So, for those two technologies, those two methodologies, we are…

Got it. That’s very helpful. If I can just sneak one more in on Savanna, it doesn’t sound like any supply chain issues that are affecting manufacturing of that product. Just wanted to get an update sort of on your long-term goal for that product? I think at the Analyst Day last year, you said $300 million in revenue by years three of launch. Is that still on the table here for that product? And any color on that? Thank you.

We believe so. Having been a marketer before, I would tell you that every forecast is wrong, but some are useful. And I still think that $300 million by year three is achievable. We are internally ramping our forecast down a little bit for 2022, simply because of the delays that we experienced as many other companies did because of difficult to get in the chips that we need that need to go on the instrument. We are now at the stage where we have the molds ready to go from the manufacturer of the lines for the cartridges. I think those are scheduled to ship into the U.S. here shortly. We are running a couple of things to ground. But I would say we have had some fits and starts because of supply chain, but the assays themselves, the menu looks great performance across the board. Generally, it’s very, very good. And I like the way this product look and I would like the way the customers are describing their needs on how this particular product. If we do everything that we say we are going to do. How this product will actually do in the marketplace, I think it’s very difficult to forecast the early stages of the launch, always is. I have been surprised both ways in my career, but I still feel comfortable based on everything I know that Savanna looks like a $300 million product after year three.

Thank you. Mr. Woodring. The next question is from Andrew Cooper from Raymond James and Associates. You may proceed. Mr. Cooper, your line is now open.

Sorry, I was on the mute, I am here. It’s bound to happen at some point, sorry about that. A lot has been asked, but maybe a topic that I feel like a lot of companies this quarter have been referencing has been labor. And certainly, as we think about ramping up some of your facilities and adding some more capabilities, whether it’s sales and marketing side, the R&D side, all of that. Maybe what’s your sense for labor markets and whether there is any kind of pressure there to think about on costs, both now and then as we move into ‘22 and you continue to expand from here?

That’s a fair question. Before I get there, I will say, Andrew, I think you might be the first person that’s ever left himself on mute, just control out there. Fair point, labor and the demand for labor right now is a factor. And we have recently had to make our standard labor rates. We recently had to make that just a bit higher. And once we did, we were able to attract and retain talent more easily. And I think it’s probably going to be at the end of the day, well worth it into the calculations that we have done now more recently, we factored in that higher labor rates. So, we are in good shape, but we did have to – we did have to spend a little bit more money. It is a competitive environment in Southern California for these types of jobs. And some of them are highly skilled, some are less skilled, but we have had to make an adjustment. Any time you say we are just going to hire another 400 people for the factory. Guys like me don’t think about it. The guys down the hall here, they are all panic. And so we have been at it them for a while. And I think we are in good shape. We will have people we need here moving forward, yes. Our labor though, because of the automation, please consider and I know you know this already, but our labor as a percentage of our cost is quite low, it’s less than 10%.

No, fair enough. I appreciate that. And then maybe just one more on the M&A front. I don’t believe you have kind of put global as the first example of places you might be looking. So, is that something that, as you have added this capacity maybe has moved up the list of, hey, how else can we get out to some of these markets where we are not as big, or has anything changed there? And how do we think about, I guess the priority stack when you consider M&A of what spaces are attractive?

Yes. The demand from outside the U.S., according to our international team, is significant. We have served some of that, but not to the level that we had, that we could. And I certainly think that with increased capacity, our costs are going to be lower. Our factory will be absorbed, more greatly our overhead cost as a percentage and all in terms expense for tests will be well within control, and we should be able to price competitively. Having said that, I still have an obligation to provide all the products that the federal government here in the United States is asking us for. So, until we get to the end of that, I really won’t be exploring too many ex-U.S. opportunities, but they are still out there. And we would seemly get asked because of the brand name because of the quality of our product because it’s a U.S. FDA-cleared product, we are routinely asked by foreign governments to supply products, either part of the product or all the products, but the demand is actually out there. But we are not going to get to it until at least the third quarter or fourth quarter of 2026.

Okay. I will stop there. Thanks.

Thanks Andrew.

Thank you, Mr. Cooper. The next question is from Jack Meehan with Nephron Research. You may proceed.

Thank you and good afternoon. I was hoping for a little bit more color, just talk about the monthly cadence of the COVID sales in the quarter. I know at the end of August, you had the press release saying you had already topped the 2Q number. And then obviously, for the quarter, it came in a lot bigger. So, just be helpful to get just how July, August, September went for Sofia and QuickVue and what you have seen so far in October?

Yes. September was a big step up. And I really had to do, of course, with increasing demand, employers started coming on board. The CDC guidance adjusted slightly, but it’s helpful about CVS. CVS came online. And of course, they have got a lot of stories and we had a bit of stocking going on. And so, I would say – and then a lot of sell-through in the month of September and as we go into October, we don’t want to speak to specifically, but it’s still trending not a percent step up from July, of course, but we are still seeing increasing demand. And it’s really related to just the improvement in manufacturing capacity for one, but then also our ability to distribute more closely what we are actually manufacturing. So, our ability to get the product out the door improved also as we exited Q3.

Got it. Is there a way to say how October compared to September?

Not really. But I am anticipating you’re going to ask me, Jack, I know what was Q4 look like, so I’ll just go ahead and say, I think to be reasonable, but not over the top and give ourselves a bit of flexibility. I would say that Q4 probably will look a bit like Q3. And the reason I say that is I don’t know exactly where the floor is on the professional segment. Is it at the 20 to 25 like it was in the second quarter, it’s got to be higher than that, but I don’t know how much higher than that. And – so there is a little bit of fluidity here, but if I am modeling – we are modeling something that’s around what we just did in Q3.

That’s helpful. And then back on Savanna, just wanted to clarify how you are thinking about the timeline here in terms of FDA review, FDA approval and maybe just any color around the breadth of the launch internationally so far would be helpful?

Well, we are just at the stages of figuring out where we are going to ship ex-U.S. We have got some pretty big opportunities teed up and really, I have got customers waiting for instruments. So, that’s where we are at with the ex-U.S. launches. We have demand. The band right now exceeds what we can manufacture and ship sounds familiar. So we will get going there. And in the meantime, we are in clinical trials in the U.S. And yes, it just depends on – with RVP4 COVID being a component of it, will we get a reasonably quick review time? And if so, that would tell you when we can effectively launch in the U.S., which obviously we are going to try to launch as early in 2022 as possible. Normally, as you know, Jack, we have said before that we – just for modeling purposes, we call an FDA 510(k) review about a 90-day turnaround, but who knows? These four folks at the FDA, the reviewers are just way overworked. And so – and they have been turning things around a lot faster than 90 days when it included COVID. So I am giving you all the variables, I don’t know.

That’s helpful. And then...

You will be interested in your best guess.

Well, I am going to pencil in mid-2022 and we will see how it plays out. My last question, Doug, I know it’s not a huge market for you, but there has been a lot of buzz around China and local purchasing and also efforts to promote local competition there. I think you have some exposure in Triage, but just curious what you are hearing on the ground related to that and how you think about Quidel’s positioning whether may or may not be exposure?

Yes. I think it’s a fair question. I would say the biggest issue right now is that the Beckman BNP business is reasonably significant in China and that will rollover. And so that is a factor. To the extent that the pro competitive situation in China is affecting us, I am not aware on the Triage side that we are seeing any pressure at this point in time. And we are doing a couple of things in terms of our relationships with various distributors and managing things slightly differently. So I would say, standby – I will have a better answer for you moving forward, but right now, I’d have to see a lot of movement.

Thank you, Mr. Meehan. That is all the time we have today. Please proceed with your presentation or closing remarks.

Well, thanks everybody for your support and again for your interest in Quidel. We really appreciate it. We had an excellent third quarter as you saw. It far exceeded what we thought we were going to do and kudos to my teams, particularly the operations guys, the supply chain guys, our commercial guys for figuring out how to allocate product across so many people who wanted the product, all at once. I think I couldn’t be more proud of the team and what they have gotten done. And I think it portends well for us as we move forward. We are stronger as a company across the board. We are stronger in all functional areas. We have more talent. We have better processes. We have stronger B2B relationships, particularly on the supply chain side and as a result, also much greater brand strength. And I would say in the professional segment, we have earned customer loyalty. And so, the numbers are the numbers, but at the end of the day, we are a far stronger organization as we move into 2022 as we are launching these new products. And I don’t think this company has ever been positioned better. So I will stop there, because I can keep going I think, but again, thank you for being on the call.

Ladies and gentlemen, we thank you for your participation and ask that you please disconnect your lines. Goodbye.