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, Quidel Ortho's Chief Financial Officer. This conference call is being simultaneously webcast on the Investor Relations page of our website. And a version of today's presentation can be downloaded there. Before we begin, I will cover our safe 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…

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. And 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. And 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 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. And year-to-date, the Beckman BNP assay transition was a greater than 3 percentage point headwind to revenue.…

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. And with that, operator, we're now ready to open the call for questions.

Thank you. [Operator Instructions] Our first question is with Andrew Cooper from Raymond James. Andrew, your line is open.

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. And 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 time lines 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. And we've already said that like many others that COVID seems like it's moving into more of an endemic stage. And 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. And whether we see rhinovirus infections, adeno, influenza, RSV or whatever or including COVID, we're going to need that capacity whether it's with QuickVue tests or with Sofia tests. Because remember, we're developing menu for both the particular emphasis on menu for Sofia. So we're going to need that capacity. On the other side, what we're suggesting is the demand for the slides for the vitro systems have steadily increased. We're adding more manufacturing line 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. Do you want to add something, Joe?

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.

Great. Thank you, guys for taking the questions. Doug, maybe a follow-up on the Savanna piece. It sounds like you're basically kind of saying if the U.S. gets pushed out, well, to sell more in Europe. I mean, am I reading through the lines correctly that essentially is -- I think you have the $300 million guide out there for a three-year period. No change to that if U.S. gets pushed out, it's just kind of coming from different places. Is that right? And then I guess with that $300 million, that guide you do have out there, I know it's not going to be linear, right? So how do we think about that as we work our way through '23, assuming, let's say, U.S. gets pushed out a little bit?

Yeah, Patrick, you're right. When we think about it, we were thinking about an EUA clearance of the RVP 4, which has already been introduced in Europe. And at this stage, being in market at the tail end of the respiratory season in the U.S., would we like to do that? Sure. But would it be a better idea to ship those boxes and that reagent to Europe where I can continually run the product throughout the respiratory season, make sure I captured the first quarter opportunity and then also be ready to go globally in the fourth quarter of 2023. So that's the thinking. And you're right, we're not making any change to the $300 million plus target that we had over the three-year period. We're just shifting we're sending the product based on the availability. So we're not going to need to allocate so much as we might have before between the two major continents. So -- anything else you want 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?

Yeah. So Patrick, remember that most -- really all of that 600 unit backlog that we discussed is on the lab side of the business. And traditionally, about half of those placements on the lab side would be reagent rental where we keep the CapEx on our balance sheet and the other half will be cash sales. So the margins on instrument sales are typically less than the margins you see on reagents and consumables. So I don't expect there -- I wouldn't expect there to be an impact on instrument revenue or instrument margins. But we did calculate that if we were able to wind down that 600-unit backlog, it would be an incremental two points of growth for the full year numbers. So it is fairly significant, and we are seeing signs of improvement on the chip market. Like Doug said, we brought on new suppliers. It is a bit of a game of whack-a-mole, sometimes with other parts that come up short and our global supply chain team is doing a fantastic job on a day-to-day basis, keeping those lines up and running. And as we said, the backlog has not changed. It's at the same place. And I wouldn't expect that 600 backlog to fully be wound down by the time you get to the end of '23, but I would expect us to make a big dent into it. And it's a little bit of a TBD. We'll probably talk more about that as we move into 2023 on how much of that 600 unit backlog, we think we can actually wind down in 2023.

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.

Yeah, Andrew, it's Joe. Those estimates are definitely still in the ballpark. FX is definitely a headwind as we move through 2022, and we don't know yet where it's going to go in '23, but I would expect FX to be a headwind in '23 as well. And obviously, that impacts the reported numbers. But from a constant currency perspective, I do still feel -- we feel good about that high single-digit top line growth. And it's going to be driven, as we've said, if you go through the business units, the labs business should grow in the range of mid-single digit to high single-digit. Point-of-care should be high single digit to low double digit. We should see nice growth in molecular due to the Savanna rollout and the transfusion medicine business will grow in the mid-single digits. So that's the math that gets you there. And then as far as the EBITDA, yes, we're still in that same range. But for sure, more to come as we close out 2022 and then get into providing the '23 guidance as we move into next 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. And 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 in 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 and -- 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 had a cost and a running out -- and I think the public is also predisposed now more than ever to want to be tested to find out what do they have actually.

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

Hey, good afternoon everyone. I was hoping we could continue the respiratory discussion there. It's been a while now since we've had a flu season, it could certainly be in the respiratory season. You got flu, RSV, COVID all going around. So when you're speaking with the distributors and the customers right now, I'm just curious, how are they preparing -- what's their inventory level? And generally, what's their plan to triage fevers and coughs between testing for flu, testing for COVID or the combo?

Yeah. We are getting pinged, Alex, from distribution. And 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. So it's hard to forecast now because you've been covering it for long time. It's hard to forecast not only the intensity of the season, but the duration. And 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?

Yeah, I would just add, Alex, that this flu season did start a little earlier than expected. There's -- we definitely -- the charts are out there that we can all see, started a little earlier. We don't exactly know the duration of this flu season. We had data points from Australia, obviously, but we also don't know if it's going to correlate precisely.

Yeah, that's right. And I would add something else that I know you already know, Alex. But when you look at the combo opportunity, we find ourselves in a situation of what fourth quarter or so where customers ordered a lot of the combo product, but the prevalence of flu is low. So then -- and you know how it works when you're predictive ability on a positive and a low prevalent situation means that physicians are seeing increasingly false positives, which is not good. So a lot of the mix that we're going to see also depends on prevalence and relative prevalence to other of the respiratory pathogens that we're going to see. I know you know all that, I'm just -- I'm reminding you.

No, that's good. Again, it's been a couple of years since the flu season so that's good. And we've got an analyst coming day coming up here. Maybe any preview -- should we expect any sort of new system announcements, pipeline development? Or is this more or less getting everyone on the same page to what to expect from the new QuidelOrtho.

Well, the most important thing I want to achieve, of course, bringing you all up to speed on where we're at, but leading the guys actually get up in front of you so that you hopefully gain the same confidence that I have and then, in other words, we're going to use this opportunity to showcase the talent that we have in the company. And so I think you'll find it to be quite interesting. We've been working on it already for a while. But we will provide updates. We will be showing instruments so that you may not, for example, be as familiar with the vitro system. So we're going to have to the vitro systems there for you to take a look at and see how all that works and the converse would be true.

Yeah. And Alex, we'll also provide a three-year outlook, too. That will be in my section. That will be fun.

We'll recognize that's very important. Thanks.

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.

No, we're in active discussions, and we are going to continue to pursue it. I'm not going to suggest that we have 100% confidence in it, whether it's point of care, mod complex, but we've been having a number of different conversations around the additional data needed to give the FDA comfort that we should move forward with an EUA. So because it's not 100% certain, we are shifting boxes that we had intended to ship early in the United States, to Europe where, frankly, the folks there have been asking for more boxes than we are shipping. So it's just that straightforward, we're hedging basically. At the same time, I am taking 100 boxes and making those available to customers in the U.S. in the next couple of months, so that we can get started doing what we would do normally anyway in the early phases of a launch. So we're by no means slowing down the launch in the U.S., but we do recognize that if we get too far into the -- in the first quarter, we're going to miss the respiratory season here in the United States. So that's why we're doing what we're doing. So I want to thank everybody for all your great questions. In closing, our first full quarter as a combined company does give us added confidence in our strategic priorities and our ability to continue delivering strong financial results over the long term. This strong third quarter reflects a remarkable cohesion, agility and performance of the overall team, added by the strength of our comprehensive product portfolio and an expanded global footprint. The integration is progressing way above expectations, and our employees are coming together even better than we had anticipated. So on behalf of the entire team, I'd like to thank you for your continued support and interest in QuidelOrtho. And just to remind you, our Investor Day will be in New York on December 13. If you haven't already and would like to receive an invitation, please just reach out to Bryan, and we'll do our best to accommodate you. Thanks, and have a great day.

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