QDEL - NASDAQ

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 in the first quarter. Drilling down now into the results for our four business units. First, our Labs business delivered a 15% improvement in non-respiratory revenue compared to the prior year period with an integrated installed base up 11% and automation up 24%. We saw sizable gains across all major geographic regions, notably in North America as well as in China following the suspension of their zero COVID policies and subsequent recovery for non-COVID laboratory testing. We reduced our instrument backlog in our Labs business by more than 20%, enabling us to ship more instruments than previously anticipated in the quarter. These shift instruments, once installed, validated and online will have a modest positive impact in 2023, setting us up for 2024 growth. Continued progress on this instrument backlog is due in large part to the success of our operations team, which has expanded output across multiple product lines and is creating resiliency and redundancy within our supply chain while driving sustainable process improvements. This is a big deal and I'm proud of their work thus far. In addition, new customer orders increased by approximately 11% from the end of Q4 to the end of Q1, which is the leading indicator of strong reagent growth later in the second half of 2023 and 2024. Second, our Point-of-Care business exceeded our expectations in the quarter, despite the respiratory season pull-forward from Q1 into Q4. We shipped more COVID tests to the government against the two contracts we had on hand. And with the public health emergency orders set to expire this month, consumers acquired significantly more COVID-19 at-home testing kits in the first quarter than expected. It's important to note that in this endemic phase, we are operating in a new world. We've undergone a paradigm shift where consumers are more in control over their healthcare decisions than ever before. Consumers and lawmakers formed a greater appreciation for the value of diagnostic testing. Decentralization proliferated as physician offices added point-of-care systems and learned of the value these systems provided through the speed through diagnosis. This resulted in more informed treatment decisions before patients left the office setting, and ultimately increased practice demand for a broader menu of point-of-care tests. Moreover, the greater availability of at-home tests led consumers to learn how to perform nasal swabs, read test results, and obtain medical care via virtual doctor visits. Third, in our Transfusion Medicine business, revenues were down 8% from the year-ago period due to strong revenue in the prior year, and a broader macro trend of declining blood donations in the United States. Blood donations at business hosted blood drives were down by 50% in 2022 from 2019 and extreme weather across the U.S. in recent months has had a compounding effect on the broader blood shortage. We recognized these trends early on and expect this business to experience continued softness over the course of 2023 due to market-wide challenges. Lastly, our Molecular Diagnostics business declined 75% compared to the first quarter of 2022. Due to weakness in our Lyra sales as higher volume laboratory COVID-19 testing declined, offset modestly by revenue from early Savanna adopters. While we recognized there are broader macroeconomic and supply chain challenges, our combined organization has been agile, innovative and unrelenting. We are one of the larger pure-play diagnostic companies with a broad portfolio spanning the diagnostics continuum from Labs, Transfusion Medicine and Molecular Diagnostics to Point-of-Care with a total addressable market of $48 billion. The entire healthcare sector is facing long-term secular trends from the aging population and the surge of chronic conditions and diseases to increasing global access to care, escalating costs of healthcare and emerging infectious diseases. If you combine these trends with the shift to patient empowerment and the increase in self-care, there is a significant increase in global demand for global testing that could accelerate market growth far beyond the 5% to 7% market growth rate that we had previously forecasted for the market, which bodes well for the entire diagnostics market segment and for our long-term growth expectation of high-single digits. We are witnessing crucial developments in our immediate industry, such as the miniaturization of devices, consumerization of care and cost reductions. Technological advancements are unlocking new biomarkers in advancing proteomics, liquid biopsy, and antimicrobial resistance capabilities. New care modalities are also emerging, including remote monitoring in both synchronous and asynchronous care. Cost effectiveness, supply chain and scalability will remain essential for all of us, but make no mistake, diagnostics is evolving rapidly and is the place to be. In the meantime, we remain focused on our three near-term growth drivers, the VITROS System in our Labs business, the Sofia platform within the Point-of-Care business, and the Savanna Molecular platform in our Molecular Diagnostics business. These are the three growth engines that matter most to us in the near-term, and we are executing at speed on each of these programs. Growth in our Labs business is fueled by the placement of our integrated analyzers and the pull-through of higher growth, higher margin immunoassays alongside our historical strength in clinical chemistry. Our focus on mid and high throughput hospital labs where we offer the lowest cost of ownership in the market, coupled with our award-winning customer service, have further added to our strength. Looking ahead, we have 20 to 25 new and refreshed assays planned for launched by the end of 2024. On the instrument side, we continue to make progress toward a planned refresh of our VITROS Systems and software, new automation and informatics launches and the rollout of VITROS Duo, which is an easy to implement VITROS automation solution that is faster than traditional feature-rich automation solutions. These future developments are expected to better enable our integrated growth strategy within our sweet spot and help customers solve their labor challenges. We expect to accelerate both integrated and automation growth from new customers and new to automation current customers. Our next growth priority is the development of assays for the Sofia platform. With over 87,000 cumulative instrument placements globally, this is an incredible asset that should be leveraged fully. In the meantime, we expect our existing Sofia assays to continue to drive point-of-care market share gains in the respiratory disease category, while we continue to augment our Sofia offerings through research and development efforts that expand single and combination assay menu options for our customers. Finally, the launch of our revolutionary Savanna Molecular platform is a near-term priority. Savanna uses real-time PCR and syndromic panels to address a variety of pain points across the diagnostic continuum. The platform offers speed and flexibility and is easy to use, making it suitable for use in multiple customer environments, including physician office labs, emergency departments, pharmacies, and urgent care settings, as well as hospital and reference labs. Savanna is currently available throughout Europe with plans to commercialize worldwide upon additional regulatory clearances. We are anticipating an expanded global launch ahead of the next respiratory season. We are pursuing parallel paths to EUA and 510(k) clearance, progressing toward a late Q2 EUA submission with a follow-up 510(k) shortly thereafter. We are currently in a stocking position for both the Savanna instrument and the RVP4 cartridge, and our second cartridge manufacturing line is in the final stages of validation as we work to build inventory in anticipation of Savanna's launch in the U.S. following regulatory clearance. Our initial menu includes our RVP4 respiratory viral panel, followed by an HSV/V

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 other Asia Pacific markets, grew 9%. North America, which is our largest geography by revenue delivered notable non-respiratory revenue growth driven by the strong underlying performance of our Labs business. Looking at North America respiratory. During the quarter, we shipped a total of $143 million on the two previously discussed government contracts for QuickVue at-home COVID-19 tests. We shipped the final $4 million in April and don't anticipate any further government revenue for the remainder of the year. The revenue for these contracts was more profitable than the public contract pricing may imply that we were able to use some shorter-dated product and reverse a previously recognized inventory reserve. In EMEA, solid non-respiratory revenue growth was driven by Labs, partially offset by Transfusion Medicine. The solid growth in the quarter was particularly encouraging to see given that we shipped a large number of instruments to the region, which take longer to get through customs and again pulling through consumables revenue. Our China region, which makes up about 10% of our total company revenue saw a surge of demand in hospitals that drove more than 25% growth in our Labs business in the quarter, following the end of the COVID-19 lockdown at the end of 2022. This strength in revenue included both a COVID-19 halo effect as well as durable demand for both clinical chemistry and immunoassays as patient visits to the hospital resume and selective surgery volumes increase. Importantly, double-digit growth of our Triage products and the fast market penetration of the newly launched Sofia 2 within our Point-of-Care business unit are the most quantifiable demonstration of revenue synergies to date. Now turning to our Q1 non-respiratory revenue by category. Recurring revenue, which includes reagents, service and other consumables grew 6%. Instrument revenue grew 26% as instrument demand was robust, and we worked down our open labs instrument orders by over 20% to approximately 500 instruments from 650 at the end of 2022. And while global supply chain challenges appear to be easy, and we are cautiously optimistic that we will be able to keep up this unexpected pace of instrument manufacturing. One quarter doesn't make a trend, so we continue to expect elevated open orders to persist into early 2024 as we work toward our goal of a normalized 150 open orders. Now turning to Slide 9. I'd like to comment on our first quarter financial performance below revenue versus the prior year, again, on a supplemental combined basis. Gross profit margin for the quarter was 53.8%, including a 110 basis point positive impact from the previously mentioned settlement award and is consistent with our full-year expectation for low- to mid-50 gross margins. The gross margin is down from prior year to a more normalized level, largely due to the slowing of COVID-related revenue as we transition from a pandemic state to an endemic state. Adjusted EBITDA also declined year-over-year, again, due to the transition from a COVID-19 pandemic state to an endemic state, resulting in adjusted EBITDA of $245.3 million ahead of our expectations due to the strong revenue. Adjusted EBITDA margin contracted year-over-year to 29%, which includes 150 basis point positive impact from the previously mentioned settlement award, again, better than our expectations. Net interest expense for the period was $36 million, an increase of $5 million versus the prior year as anticipated due to the modest increase in the average outstanding debt balances related to the combination. Our provision for income taxes was $33 million compared to $149 million for the prior year period. This represents the first quarter adjusted tax rate of 21.5%, up from the prior period due to discrete items. And our adjusted earnings per fully diluted share for the quarter were $1.80 compared to $8.03 in the first quarter of 2022 on a supplemental combined basis. The decrease in EPS was again driven by an exceptionally strong prior year period and COVID transitioning to an endemic state. Turning to cash flow and balance sheet on Slide 10. In the first quarter and on a GAAP basis, we generated operating cash flow of $189 million, which is in line with our expectations. After funding $66 million in CapEx and adding back $4 million in integration-related CapEx and $30 million in acquisition and integration cost, we estimate recurring free cash flow to be $157 million, which is 130% of adjusted net income and 64% of our adjusted EBITDA for the quarter. In terms of capital deployment in the first quarter, we paid down $52 million of debt working towards the $206 million minimum payments in 2023. And while we did not buy back any shares in the quarter, we intend to maintain a balanced and opportunistic approach to share repurchases while also continuing to prioritize our debt paydown going forward. Notably, following the end of the quarter, we made our final $40 million payment to Abbott for the $680 million purchase of the Alere cardiometabolic assets. We ended the quarter with cash, cash equivalents and marketable securities of $431 million and total debt of $2.6 billion. We ended with 2.2x net debt-to-EBITDA on a supplemental combined basis. And as COVID-related revenue declines to an endemic level over the remainder of the year, we expect leverage to increase up to approximately 2.5x by the end of the year. The deleveraging is a top priority for us, and we have a goal to be at or below 2x net leverage by the end of 2024, while maintaining flexibility for strategic M&A opportunities. Now turning to our fiscal 2023 guidance on Slide 11. First, I'd like to provide some broader context on our outlook. Lab instrument supply issues are expected to continue to alleviate as we move through the year, which, along with the continued recovery in China are expected to drive solid growth that is back half loaded. The end of the public health emergency calls consumers to buy over-the-counter COVID-19 test, while the tests were still covered by insurers pulling forward respiratory revenue into the first half. Savanna sales in Europe are expected to ramp as we move through the year, which along with expected U.S. volumes after anticipated receipt of regulatory clearance are expected to drive meaningful revenue in the back half of the year. In light of these dynamics, we are raising our fiscal 2023 guidance as follows: Total revenue of $2.87 billion to $3.18 billion, which is up from our prior guidance of $2.8 billion to $3.1 billion. Breaking it down a little further. Non-respiratory revenue is expected to grow 4.5% to 6.5% on a constant currency basis to $2.26 billion to $2.31 billion compared to our prior guidance of 4% to 6% growth or $2.21 billion to $2.25 billion. Respiratory revenue of $610 million to $875 million included COVID revenue of $300 million to $500 million is unchanged. Adjusted EBITDA margin of 27.2% to 28.3% for adjusted EBITDA in the range of $815 million to $865 million, which is up from our prior guidance of $800 million to $850 million. Adjusted diluted EPS is now expected to be in the range of $5.15 to $5.70, up from our prior guidance of $5 to $5.60. In addition, I'd like to discuss the assumptions I covered last quarter, that will be helpful for modeling purposes. At current rates, currency translation is expected to be about neutral to full-year sales and adjusted EBITDA with a higher FX impact on the non-respiratory revenue. As previously discussed and consistent with prior years, the first and the fourth quarters are seasonally the strongest quarters of the year for us. We expect Q2 2023 margins to reflect the lowest revenue quarter of the year and the investments we are making ahead of the Savanna launch in the U.S. Net interest expense continues to be expected in the range of $145 million to $150 million for the full-year, and we continue to expect the full-year adjusted tax rate of approximately 23.5%. We continue to expect recurring free cash flow to be at the low end of the 50% to 65% of adjusted EBITDA, which translates into more than 100% of adjusted net income. And finally, full-year diluted weighted average share count of $67.2 million. With that, I will now turn the call back to Doug to make a few summary comments.

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.