Welcome to the QuidelOrtho First Quarter 2023 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 first quarter financial results conference call. With me today to discuss our financial results are Doug Bryant, QuidelOrtho's President 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 Harbor statement. The statements we will make during this call about the Company's future expectations, plans and prospects are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which provides a Safe Harbor for such statements. Forward-looking statements are subject to a number of risks, uncertainties and other factors that can 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 annual report on Form 10-K filed with the SEC on February 23, 2023, 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 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 or for any other reason. Also, during today's call, to facilitate a comparison of the Company's operating performance from the first quarter of 2022 before the QuidelOrtho combination for the first quarter of 2023, we will be discussing supplemental revenue and other supplemental adjusted operating results as if Quidel and Ortho have been combined for the applicable periods. We will refer to this information as our supplemental combined information. Certain 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 QuidelOrtho website. Lastly, unless stated otherwise, all year-over-year revenue growth rates, including revenue growth ranges given on today's call, are given on a comparable constant currency basis. Now, I'd like to turn the call over to Doug Bryant, QuidelOrtho's President and CEO. Doug?

Thank you, Bryan. Good afternoon, and thanks everybody for joining us today. QuidelOrtho delivered excellent results in the first quarter, reflecting sustained high levels of execution of our growth strategy. Demand for diagnostics across the healthcare continuum remained strong. Our Labs business delivered solid results, and we achieved better-than-expected point-of-care sales. Further, we saw growth across all major geographic regions, including strong performance in China. The broader medical industry is becoming increasingly aware of the need for decentralized healthcare that includes telehealth, diagnostics, and pharmaceuticals. Recent M&A activity across our industry supports the thesis that the value of diagnostics is critical and here to stay. In addition, as the U.S. prepares for the end of the public health emergency next week, and as our company looks beyond the pandemic, we believe we have the right strategy, products and most importantly, the team to achieve our 2023 guidance and execute on our long-term growth goals. This afternoon, I'll highlight our performance in the first quarter, discuss our areas of focus and the clear opportunities for growth in 2023 and beyond. Looking at our first quarter, we again exceeded expectations, reporting revenue of roughly $846 million with non-respiratory revenue up 7% on a supplemental combined basis. Our respiratory revenue, which began to accelerate from mid-Q3 and throughout Q4 last year due to the early and severe onset of the respiratory season, was predictably down in Q1. This shift in flu seasonality was offset by continued strong demand for our diagnostic solutions and solid non-respiratory revenue growth across all major geographic regions. As we approached the one-year mark of becoming QuidelOrtho, the strength of our combined organization is becoming apparent and our financial performance in the first quarter of 2023 is a clear indicator. Overall, I'm very pleased with our performance and results…

Thanks, Doug, and good afternoon, everyone. Before I discuss our financial results for the first quarter, I want to remind you that to facilitate a year-over-year comparison of the company's operating performance, all growth rates that I referenced are presented on a supplemental combined basis as if Quidel and Ortho has been combined for the applicable period and maybe referred to as supplemental combined information. As Doug just mentioned, we exited 2022 with strong momentum that continued into the first quarter of 2023. Starting with a breakdown of Q1 revenue on Slide 8, non-respiratory revenue grew 7% in constant currency to $581 million, driven by strength in our Labs business unit. The growth was strong in our Labs business unit even excluding an approximate $21 million settlement award from a third-party related to one of our collaboration agreements. Respiratory revenue totaled $266 million in the quarter, including $216 million in COVID-related revenue. Respiratory revenue was stronger than expected despite the earlier respiratory season pulled forward revenue in the Q4 of last year versus a normal Q1 peak respiratory season. In total, revenue was down 44% to $846 million, reflecting the strong flu and COVID-related revenue in the first quarter of 2022. Strength of our COVID-related revenue year-ago highlights what we and others in the diagnostics space have been saying for several quarters now. We believe COVID-19 is transitioning to an endemic state and will continue to circulate like any other respiratory disease. And appropriately, we now bucket COVID-19 revenue with our other respiratory revenue. Turning to our quarterly performance by geography on a constant currency basis and excluding respiratory revenue, all major geographic regions grew nicely in the quarter. North America revenue grew 5%, EMEA grew 4%, China grew 21% and our other region, which includes Latin America, Japan and…

Thank you, Joe. I'll now conclude the prepared remarks portion of the call by recognizing my QuidelOrtho colleagues for the ongoing passion, collaboration and engagement that they bring to work each and every day. They are the core to our mission, transforming the power of diagnostics into a healthier future, while improving countless lives along the way. I'm very pleased with our strong track record and performance in the first quarter, with the transformation of healthcare and shifting diagnostics trends, the opportunities ahead of us are plentiful and significant. It's a great time to be involved in the diagnostic industry, and it's a great time to be here at QuidelOrtho. Now let's open up the line for Q&A.

Thank you. [Operator Instructions] Our first question comes from Conor McNamara from RBC Capital Markets. Your line is open.

Hey, guys. Thanks for the question. I appreciate, and congrats on a solid quarter. Just two quick questions, one for Joe, and one for Doug. Joe, can you remind us when you had a quarter with a large box shipments that you did. How does that flow through the P&L? And then, Doug, just on the Savanna launch, what gives you confidence that you'll be able to get to market before the respiratory season? Thanks, guys.

Hey, Conor. Can you repeat the first part of that question? It was a little bit of background noise. I'm sorry.

Sorry about that. I am on an airplane. So when you have a quarter with a large shipment of boxes like we did, boxes coming out of backlogs, how does that flow through the P&L? Because I know you don't quote the entire revenue in the first quarter, so just trying to figure out when does revenue start flowing through and how the expenses go through the P&L?

Okay. I got it. Thanks, Conor. Yes. It's a good point to make that as we drill down the Labs instrument backlog throughout the year, we'll see more instrument placements and which will drive more consumable revenue. And as we've said in the past, our instrument placements are roughly globally about 50% cash deals and 50% reagent rentals. So for that 50% that's coming through as a cash deal, you will see an incremental amount of revenue coming through. We did see a little bit of that in Q1, and those instruments do come through at a slightly lower margin than the consumables does. So it will have an impact potentially of pulling the margins down slightly. But to be honest, it really didn't have a big impact on Q1. And we'll keep an eye on that as we go through the year and that instrument backlog gets drilled down. And then Doug, I think he had a Savanna question too.

Yes. Thanks for the question, Conor.

Appreciate that.

First point is that, we're in process of submitting the EUA for RVP4 and simultaneously we're working on the submission of the 510(k) package. So from a timing perspective, I think we're in reasonably good shape to be ahead of the upcoming respiratory season. In addition, I think our confidence comes from having solved supply chain issues and now more reliably making and stocking instruments. So that's not going to be a challenge for us. And we now have the second line nearly validated on the cartridge manufacturing, which puts us in really good shape in terms of the volumes that we require in 2023 and 2024. So we're pretty confident.

Great. That's all I got. Thanks guys. Appreciate it.

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

Hey, guys. Maybe just to go back to the Savanna commentary that you just talked about, Doug. Can you maybe just sort of talk about the steps for menu development for here? How should we be thinking about additional assays rolling off over the next handful of years? And what can you tell us around sort of your capacity for additional panels here? Thanks.

Thanks, Andrew. We are well on our way on assay development and almost everything that we had teed up for what I would call wave one. And I would say our clin and rec teams are already teed up with respect to the clinical trials. So the assays that I mentioned in the script are very much on track. Is there further work to do here and there? Yes. But for the most part, technical issues are not obviously insurmountable. I don't see anything that would preclude us from launching any of those things that we had listed earlier on the call. And then further to that, moving forward, we will describe additional assays that we also are working on that we haven't yet discussed. But we're in pretty good shape on wave one. And I would say wave two, standby. But I think we have the obvious things that are going to be needed as we launch so that can address what I called earlier, the pain points across the continuum. And so I feel really good about where we're at and the menu that we have in development at this stage.

Okay. Thanks. And then Joe, maybe a couple for you on the guidance. Just first, can you just sort of reiterate what's included in the guide for the year for Savanna? And then secondly, just on the margin front, I think you called out Q2 being the low point for margin for the year. But can you just – is there anything you can give us in terms of color and to get a better idea of the magnitude of that change quarter-over-quarter on the operating margin side? Thanks.

Yes. So the first question, Andrew, with Savanna. There's really no change with what we said on the Q4 call related to Savanna guidance. We are going to be – we're going to continue to ramp in Europe, and we are expecting regulatory clearance in the U.S. So we're expecting to have products available for the Q4 respiratory season. So I wouldn't say there's no change really to the guidance that we gave in Q4 related to Savanna. So we'll just continue to click along there. And then as far as the margins that – and specifically Q2 as we've been saying seasonally for us, Q2 is going to be our lowest revenue quarter. And with that low revenue quarter, we're certainly going to have some margins, particularly the gross margin and EBITDA margins are going to be the lowest of the year. And then as you move through the year into Q3 and particularly into Q4, which will be another – we expect to be a really strong quarter. Those margins will pick back up. So for full-year, we expect that the gross margins will be as we've said in the low to mid-50s range and the EBITDA margin, as we said, we'll be in that sort of 27.5% to 28.5% range in that range. So no change there.

Our next question comes from Patrick Donnelly from Citi. Your line is open.

Hey guys. Thank you for taking the questions. Doug or Joe, maybe just on China, nice performance there. You guys sounded pretty good even back when you gave the guidance, but January was trending well. Can you just talk about, I guess, what you saw as the quarter progressed how things are trending as we work our way through April and just baseline expectations for China this year in terms of the recovery?

Yes, it was a great quarter for us for China. And the Chinese team did a fantastic job recovering from the lockdowns so quickly, it was amazing work by our team. And so the Labs business was, as I said in the remarks, it was up 25%, given that when hospitals opened, there was quite a surge of patients coming into the hospital. And initially, I would say, early in the quarter, we did see some – what I define as we call COVID payload impact. This is when folks come into the hospital with COVID symptoms. And we saw this in the U.S. a couple of years ago. There was no change, no difference. There's a lot of Vitamin D testing and things like that, PCT testing. And so we did see a COVID halo effect. I would estimate it was probably about $4 million. And so maybe like about six or seven points of growth. So even if you pull out that halo impact, which we do think there could be another halo impact if there's additional COVID surges throughout the year in China, but we're not really anticipating that, so that could be upside. But given the strong Q1, we think that for the full-year, we're going to be solidly in double-digit growth. And that's an ex-COVID growth figure too because remember that in Q2 of last year in China, there was a fairly large government order for COVID revenue or COVID test in Taiwan. So that will pull the overall growth rate down, but for ex-COVID, we do expect to have really, really solid growth for the full-year.

And just – that was great, Joe. And just to clarify, too, Chinese team did an excellent job mobilizing and getting back in market. But a lot of it was truly market-driven. And when we talk about halo effect, what we're really talking about is the collateral benefit of the patient who presents in these settings where the VITROS instrument sits and these almost stat labs. And so these people end up with a number of immunoassays that are also requested. And these are the assays also that generate for us the greatest gross margin. So a really nice job, but also benefited from all these patients now presenting to the health care system. And I think that, that will continue as there's probably still a backlog of patients, offset, of course, by what Joe said, which was we do have a tough comp because we shipped about $29 million worth of COVID to Taiwan last year, that's not going to repeat, right.

Okay. And then maybe just a quick one on the respiratory guide, basically put up a pretty nice beat this quarter, maintain the guide for the full-year. Was that essentially, Joe, to your point about some pull forward of revs and then maybe wanting to derisk that second half ramp a little bit. There was quite a bit of focus on that post the guidance, as you know, so maybe just talk through how you approach that, given the results in the quarter. Thank you guys.

Let me start and then Joe will provide far more detail. But remember, in the endemic state, we had – assuming that we are now in that pandemic state, we had forecasted that we would be doing $200 million to $400 million per year over the next few years, this year, next year and perhaps beyond that was how we derisked the number. The 300 to 500 was to take under account federal orders that we knew we had already on hand and assumed that there would be some level of shipment. So all of that was shipped in the first quarter, a small amount, I think a tiny amount, maybe $4 million or so, we shipped in April as well, and now we're done with the fed orders, right. So I think that, that coupled with the run rate that we had forecasted plus a little bit of pull forward on the retail segment. As a number of the retail – the large retailers actually had programs where patients would order product online, and then we go pick on that – pick the product at stores, that sort of offset. So I think we're still very comfortable that moving forward will be in that 200 to 400 range for COVID. And this year, obviously, we're forecasting to be slightly higher.

Yes. And just to put a bow on that, and Patrick, you said it right at the beginning of your question, we do think that we derisk the balance of your forecast for respiratory and COVID because we're not changing it, and we did overachieve in Q1.

Our next question comes from Andrew Cooper from Raymond James. Your line is open.

Hey, guys. Nice quarter. And appreciate the questions. Maybe just to start, I do want to make sure I kind of understand a little bit on the margin side. I think the comment was even without the one-timer in labs. It was a little bit better than expected in 1Q. When I look at the actual margin, not the dollar basis, though, we're sliding a tiny bit lower for the year, is that, hey, most of the incremental is lab instruments that’s your earlier point, are a little bit lower margin? Is there something geographic? Just help us understand maybe kind of the moving parts around the actual percentage margin. Like I said, I know it's minimal, but I just want to make sure we kind of have the moving parts there.

Yes. Hey, Andrew, it's Joe. I do think the margins for Q1, particularly the gross margin, we're really in line with what we expected, but if it was lower than maybe what you were expecting then I would say it might be one of three things. It could be the slightly higher amount of instrument revenue that we talked about earlier on this call, due to the Labs backlog drill down. And then you've got the government orders, which Doug mentioned which we fulfilled, which probably had a little bit lower margin than previously. And then the third thing would be just that the pull forward of the flu revenue into Q4, that flu revenue would come through at higher revenue and that was normal. Yes, it would normally fall into Q1, and a lot of that pulled into Q4. So those would be the three reasons. But really no change from the business – everything...

You were just referring to the chemistry side or the vitro side?

No. I didn’t mean that. I meant in terms of guidance, you're raising that the revenue by more than kind of EBITDA, the implied margin is 27.2% to 28.3%, which is, like I said, just a touch lower. So I just wanted to kind of understand, you would think the incremental revenue would come from a contribution margin, maybe a little bit higher than it is. So that's really what I was asking.

Andrew, sorry about that, I was talking about Q1. But for the full-year, for the EBITDA margin, you're totally right. It's the – it's a product mix. It's slightly more instrument revenue than we had expected a couple of months ago.

Okay. Very helpful. And then just really quickly, on the $21 million one-timer. I just want to kind of make sure when you mentioned collaboration agreement or collaboration settlement. Any impact there to something that perhaps was going to generate revenues down the road that has changed? Or do we think of that as sort of put to bed and no impact in any way on a go-forward basis?

Yes, no impact on a go-forward basis, yes.

Okay. I'll stop there. Thanks guys.

Thanks, Andrew.

Our next question comes from Alex Nowak from Craig-Hallum. Your line is open.

Okay. Great. Good afternoon, everyone. I had a couple of calls, I was just jumping around. But I guess my question really is, given that COVID is no longer considered an emergency by the White House, do you still think that Savanna can get an EUA? And if it's going to be a 510(k) that's ultimately approval path U.S., what is that time line? Was it due to guidance?

Yes. So I'm trying to find the – I've got a couple of notes on that, assuming Alex, that you have something on that. But the guidance that we've been given is that existing new ways will remain in effect, and the FDA is authorized to continue to accept new EUAs of certain criteria are met. And for the purposes of this discussion, you're obviously referring to you may be referring to the Savanna EUA. Savanna meets the criteria that the FDA are looking for and it's also part of the ITEP program, which theoretically could position us well for that review. So for the average company that's submitting an EUA, the FDA does have the ability at its discretion to determine whether it will review it or not. I have no reason to believe that the products that we have submitted will not be. And in fact, we have 10 COVID-19 product submissions including several that are already in active review now and others planned over the coming months. So obviously, if we wouldn't spend the money and the effort if we didn't think that we would be successful in that process. Having said that, simultaneously, we are planning to submit 510(k)s on a number of these products as well. So that's sort of the answer to that specific question. I would just add on a couple of other things that are in play, CMS will no longer pay for at-home test. So that's why the push early in the quarter, but some patients who are encouraged probably by their retail pharmacies have ordered the product and bought the product. But we do believe that CMS will continue to pay for laboratory tests when ordered by a provider. State Medicaid programs are going to continue as they are until the end of September. And at that time, each state will have to determine whether they're going to move forward and in what way they do that. So I probably over answered the question, Alex, but hopefully, I did.

Our next question comes from Casey Woodring from JPMorgan. Your line is open.

Great. Thank you for taking my questions. I apologize if I missed this on the call, but can you talk about how much of that non-COVID respiratory number was flu in the quarter? And then just I know 1Q had to pull forward dynamic. But can you talk about what's implied from a quarterly phasing perspective for flu, just looking at it 2Q and 3Q come in below 1Q, even to a lesser degree than normal, that implies a pretty steep ramp in 4Q to get to that $230 million to $270 million number. So curious on how you're thinking about that and the confidence level there?

Yes. Hey, Casey, it's Joe. The full number was obviously not as strong as previous Q1s. We did say it in the remarks that we did about – you can do the math, it was about $50 million of flu and other RSV and strep in the quarter. And so we still think that relative to the full-year guidance, we're in pretty good shape for the full-year. As a matter of fact, if you look at the midpoint of our 2023 guidance in the respiratory bucket relative to what happened in 2022, it's still down about 10%. And so we're not obviously assuming another record flu season like we had in Q4 of last year. But we do think that given the strong start in respiratory in Q1 and us keeping the guidance the same. We think that we have definitely derisked the overall respiratory guidance for the full-year.

Our next question comes from Eliza Garcia from UBS. Your line is open.

Hey guys. Thanks for taking the questions. So I'll start off with that. I have two really quick ones. So Sofia, another 2,000 installs. I guess maybe if you could dig in there a little bit at a kind of where you're placing incremental instruments. I think just given all the placements that might be a little bit surprising, just maybe customer sets. I know you alluded some strong placements in China if that was geographic. And then on the China piece, I was just wondering if you could maybe level set on timelines there with the joint venture. I think things were a little bit of [indiscernible] last time you gave an update, but just sort of frame the manufacturing initiatives for us. Any timelines there, that would be great?

Well, I'll jump on the first question on the Sofia. The instruments you're referencing are incremental. And I think what you're seeing, as I said, is a paradigm shift in the way people think about health care. I think the experience in the last couple of years has led physicians to understand the other tests other than COVID can be run in their facility. And you're seeing a lot of placements that are related to flu, RSV and strep and not just COVID. So I think that's what's driving the incremental. And I think it's across a number of geographies, but it's still important the growth here in the United States is still a pretty big factor for us.

Yes, I can. Eliza, I can address the second question on the China local manufacturing. So I think we've already talked about the fact that we've got the joint venture related to the consumables manufacturing in place and up and running. And so that's moving down the field. As far as the instrument of the local instrument manufacturing, I want to first of all, state that there's no impact to our numbers right now. We're not seeing impacts to our business because we don't have that local instrument manufacturing yet, but we are working very hard to get it in place. And I would expect us to have it in place by the earliest end of this year is likely to slip into probably the first half of 2024.

Our final question comes from Jack Meehan from Nephron Research. Your line is open.

Thank you. Good afternoon. Doug, I wanted – just because this is so important, I wanted to drill in a little bit more on regulatory pathway for Savanna. I think last quarter, one of the conferences, you talk about hoping to get the EUA approval in April or at latest early May. It sounds like you're still working on the package. Can you just talk like what has driven delay? Has FDA asked for additional data? Just how much of this is blocking and tackling kind of to get to the finish line here?

Yes, we've been working with the group, Jack, called ITEP, the RADx program. And we thought that, that was a better path for us to pursue that might have better certainty. And the trial itself is different slightly. So it created a need to go back and do more work. And that's why we believe that we will have all that submitted the trial is done and the data submitted by second quarter.

This concludes our Q&A. I'll now hand back to Doug Bryant, CEO, for any final remarks.

Well, thanks, everybody, for the great questions. On behalf of the entire management team, I'd like to thank you for your support, of course, and your interest in QuidelOrtho. We look forward to sharing our journey with all of you moving forward. Thanks a lot.

Ladies and gentlemen, today's call has now concluded. We'd like to thank you for your participation. You may now disconnect your lines.