QUIDELORTHO CORPORATION In this Quarterly Report, all references to "we," "our" and "us" refer toQuidel Corporation and its subsidiaries. Future Uncertainties and Forward-Looking Statements This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For this purpose, any statements contained herein that are not statements of historical fact, including without limitation certain statements under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 1A, "Risk Factors" and located elsewhere herein regarding industry prospects and our results of operations or financial position, may be deemed to be forward-looking statements. Without limiting the foregoing, the words "may," "will," "should," "might," "expect," "anticipate," "estimate," "plan," "intend," "goal," "project," "strategy," "future," and similar words are intended to identify forward-looking statements. Our business is subject to a number of risks, including those discussed under Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q and Part I, Item IA, "Risk Factors" of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , that could cause actual results to differ materially from those indicated by forward-looking statements made herein and presented elsewhere by management from time to time. Such forward-looking statements represent management's current expectations and are inherently uncertain. Investors are warned that actual results may differ from management's expectations. The following should be read in conjunction with the Consolidated Financial Statements and notes thereto beginning on page 3 of this Quarterly Report. Overview We have a leadership position in the development, manufacturing and marketing of rapid diagnostic testing solutions. We separate these into our four product categories: rapid immunoassay, cardiometabolic immunoassay, molecular diagnostic solutions and specialized diagnostic solutions. We currently sell our products directly to end users and distributors, in each case, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies and wellness screening centers, as well as for individual, non-professional, over-the-counter ("OTC") use. More recently, we have begun to reach significant new markets as we introduced our QuickVue® At-Home OTC COVID-19 Test for reopening schools, and for health departments, employers, entertainment centers and many other locations. We market our products through a network of distributors and a direct sales force. We operate in one business segment that develops, manufactures and markets our products globally. Impact of COVID-19 Pandemic Events surrounding the SARS-CoV-2 virus that emerged in late 2019 and the ensuing global pandemic has had a dramatic impact on businesses globally and our business as well. The severity and duration of the pandemic and economic repercussions of the virus and government actions in response to the pandemic remain uncertain and will ultimately depend on many factors, including the speed of global dissemination and effectiveness of the vaccination and containment efforts throughout the world, the duration and spread of the virus as well as potential seasonality, variants or new outbreaks. Inthe United States , federal, state, and local government directives and policies have been put in place to manage public health concerns and address the economic impacts, including reduced business activity, increased unemployment, and overall uncertainty presented by this new healthcare challenge. Similar actions have been taken by governments around the world. While all our sites are currently operational globally, our facilities could be required to temporarily curtail production levels or temporarily cease operations based on government mandates or as a result of the pandemic. To mitigate risks, we continue to evaluate the extent to which COVID-19 may impact our business and operations and adjust risk mitigation planning and business continuity activities as needed. New SARS-CoV-2 Diagnostic Products As a leader in point-of-care diagnostics and with established expertise in respiratory infectious disease products, we were and remain well-positioned to respond to the COVID-19 pandemic. We work closely with national and local governments, agencies, and industry partners to develop, manufacture and supply critical diagnostic products to support testing initiatives to help curb the spread of the SARS-CoV-2 virus. In particular, we developed new molecular and antigen products to diagnose the SARS-CoV-2 virus. We have experienced exceptional demand for such products. In response, we committed significant resources toward the expansion of our production capacity. 18 -------------------------------------------------------------------------------- We expect demand for our molecular and antigen assays and instruments to continue for the near-term, especially inthe United States . At the same time, we also have observed fluctuating demand for certain of our other diagnostic products. The extent to which COVID-19 will impact demand for our products depends on future developments, which are highly uncertain and very difficult to predict, including new information that may emerge concerning the severity of the coronavirus, regulatory changes in any of the markets in which we serve, impact of new SARS-CoV-2 variants and actions to contain and treat its impacts, including the vaccination programs now being implemented. Operations and Employee Safety While many governments implemented lockdown and shelter-in-place orders, requiring non-essential businesses to shut down operations, our business is deemed "essential" and we continued to operate, manufacture and distribute products to customers. We implemented preparedness plans designed to help protect the safety of our employees and maintain operational continuity with an emphasis on manufacturing, product distribution and product development during this crisis. To date, we have been able to maintain our operations without significant interruption and have been able to develop and quickly scale manufacturing capacity for new products related to the COVID-19 pandemic. To mitigate the pandemic's impact, we implemented preventative protocols intended to help safeguard our on-site employees and maintain business continuity. These measures have created additional burdens on our infrastructure and information technology ("IT") systems and may result in decreased productivity and increased operating costs. However, the various responses we have put in place have to date resulted in limited disruption to our normal business operations. Supply Chains As a result of the COVID-19 pandemic, we have seen delays in receipts for certain raw materials and components for our products. Such delays can result in disruption to our business operations. In response, we have increased safety stock of certain critical components and finished goods for which we have seen extraordinary demand. We are continuously evaluating our supply chain to identify potential gaps and take steps intended to help ensure continuity. We have considered potential political, legal or regulatory actions that could be taken as a result of the pandemic in jurisdictions where we manufacture, source or distribute products that could impact our supply of products to our customers or the availability of raw materials and components from our suppliers. We cannot currently predict the frequency, duration or scope of these government actions and any supply disruptions, and the availability of various products is dependent on our suppliers, their location and the extent to which they are impacted by the COVID-19 pandemic, among other factors. We are proactively working with manufacturers, industry partners and government agencies to help meet the needs of our customers during the pandemic. Our inventory levels may fluctuate due to supply chain variability in conjunction with larger and more frequent customer orders. In response, we have added alternate suppliers for certain critical components and instruments, increased inventory of raw materials needed in our operations, increased manufacturing capacity and continue to explore opportunities for further expansion in ourAthens, Ohio andSan Diego, California facilities. InJanuary 2021 , we significantly expanded our capacity by entering into a long-term lease for an additional manufacturing facility inCarlsbad, California . This facility began operations inOctober 2021 . We are seeking to minimize the impact of delays and secure allocations of vital raw materials to meet demand for our products. However, dependent on the mitigation efforts and vaccination roll outs, we may continue to experience some sort of interruption to our supply chains, and such an interruption could materially affect our ability to timely manufacture and distribute our products and unfavorably impact our results of operations depending on the nature and duration of such interruption. Outlook Our financial performance and results of operations will depend on future developments and other factors that are highly uncertain, continuously evolving and unpredictable, including the duration, severity and continuation of outbreak surges of the COVID-19 pandemic, actions to contain the spread of the virus such as mask wearing, social distancing and vaccination efforts globally, and the impact of these and other factors on COVID-19 testing demand. While we have seen fluctuations in COVID-19 testing demand, we continue to believe that for at least the remainder of 2021, some level of COVID-19 testing demand will be sustainable. We believe ongoing COVID-19 testing will be required as communities attempt a return to more normal practices in schools, the workplace and entertainment venues. With respect to our core products, we anticipate revenue growth for these products for the fourth quarter of 2021, assuming a normalized respiratory season. 19 -------------------------------------------------------------------------------- We expect to continue to invest heavily in research and development activities for our next generation immunoassay and molecular platforms, as well as additional assays to be launched on our current platforms. Additionally, we are making substantial investments in the expansion of our production capacity. While initially this expansion was to address the testing demand driven by the COVID-19 pandemic, in the long-term, we expect this expansion to provide increased flexibility to address opportunities for new products and new markets globally. We intend to continue our focus on prudently managing our business and delivering improved financial results, while at the same time striving to introduce new products into the market and maintain our emphasis on research and development investments for longer-term growth. Finally, we expect to continue to evaluate strategic opportunities to acquire new product lines, technologies and companies. Three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 Total Revenues The following table compares total revenues for the three months endedSeptember 30, 2021 and 2020 (in thousands, except percentages): Three Months Ended September 30, Increase (Decrease) 2021 2020 $ % Rapid Immunoassay$ 378,721 $ 337,042 $ 41,679 12 % Cardiometabolic Immunoassay 64,790 64,810 (20) - % Molecular Diagnostic Solutions 54,834 62,993 (8,159) (13) % Specialized Diagnostic Solutions 11,391 11,213 178 2 % Total revenues$ 509,736 $ 476,058 $ 33,678 7 % For the three months endedSeptember 30, 2021 , total revenues increased to$509.7 million from$476.1 million for the same period in the prior year. The Rapid Immunoassay category was the largest contributor to revenue growth, driven primarily by demand for the QuickVue SARS Antigen assays. Molecular Diagnostic Solutions sales decreased$8.2 million driven primarily by decreased pricing for the Lyra® SARS Antigen assay, partially offset by sales of the Solana® SARS Antigen assay. Currency exchange rate impact for the quarter endedSeptember 30, 2021 was favorable by$1.0 million , which had a 0.1% impact on the growth rate. Gross Profit Gross profit decreased to$373.4 million , or 73% of revenue for the three months endedSeptember 30, 2021 , compared to$383.6 million , or 81% of revenue for the three months endedSeptember 30, 2020 . The decreased gross profit was driven by a shift in product mix and lower selling prices for our SARS products. Increases in supply chain and other indirect manufacturing costs also contributed to lower gross profit in the current period. Gross margin for the three months endedSeptember 30, 2021 declined as compared to the same period in the prior year due to the same factors. Operating Expenses The following table compares operating expenses for the three months endedSeptember 30, 2021 and 2020 (in thousands, except percentages): Three Months Ended September 30, 2021 2020 Operating As a % of Operating As a % of Increase (Decrease) expenses total revenues expenses total revenues $ % Research and development$ 23,676 5 %$ 21,448 5 % $ 2,228 10 % Sales and marketing$ 46,778 9 %$ 37,413 8 % $ 9,365 25 % General and administrative$ 21,113 4 %$ 16,410 3 % $ 4,703 29 % Acquisition and integration costs $ - - %$ 389 - % $ (389) (100) % 20
-------------------------------------------------------------------------------- Research and Development Expense Research and development expense for the three months endedSeptember 30, 2021 was heavily focused on Savanna instrument and cartridge development and clinical work. Other key areas included development of the QuickVue OTC assay and the related software applications that enhance the user experience, Sofia® serology and gastrointestinal assays and the next generation platform. Research and development expense increased to$23.7 million from$21.4 million for the same period in the prior year, primarily due to increased spending on the Savanna instrument and cartridge development in support ofU.S. clinical trials. Research and development expense includes direct external costs such as fees paid to third-party contractors and consultants, and internal direct and indirect costs such as compensation and other expenses for research and development personnel, supplies and materials, clinical trials and studies, facility costs and depreciation. Sales and Marketing Expense Sales and marketing expense for the three months endedSeptember 30, 2021 increased to$46.8 million from$37.4 million for the same period in the prior year, primarily due to higher product promotional spend associated with the launch of the QuickVue At-Home OTC COVID-19 Test, as well as increased freight expense and higher compensation costs driven by increased headcount and improved performance in the quarter, partially offset by a decrease in bad debt expense. General and Administrative Expense General and administrative expense for the three months endedSeptember 30, 2021 increased to$21.1 million from$16.4 million for the same period in the prior year due to increased spend on IT projects and higher compensation costs driven by increased headcount to support the growth of the business. Acquisition and Integration Costs Acquisition and integration costs decreased by$0.4 million for the three months endedSeptember 30, 2021 compared to the same period in the prior year. Other Expense, Net The following table compares Other expense, net, for the three months endedSeptember 30, 2021 and 2020 (in thousands, except percentages): Three months ended September 30, Increase (decrease) 2021 2020 $ % Interest and other expense, net $ (347)$ (1,797) $ (1,450) (81) % Loss on extinguishment of debt - (10,384) (10,384) (100) % Total other expense, net $ (347)$ (12,181) $ (11,834) (97) % Interest and other expense, net primarily relates to accretion of interest on the deferred consideration, coupon and accretion of interest related to our Convertible Notes (in the 2020 period) and interest and amortization of deferred financing costs associated with our Credit Agreement. Interest and other expense, net for the three months endedSeptember 30, 2021 decreased to$0.3 million from$1.8 million for the same period in the prior year, primarily due to the maturity of the Company's Convertible Notes inDecember 2020 , including an unfavorable$1.1 million change in fair value of derivative liabilities associated with a Convertible Notes conversion in the second quarter of 2020. Additionally, interest expense decreased due to lower deferred consideration liability outstanding during 2021. Loss on extinguishment of debt of$10.4 million for the three months endedSeptember 30, 2020 related to the extinguishment of$5.9 million in aggregate principal amount of the Convertible Notes, which were converted and settled in cash during the period. Income Taxes For the three months endedSeptember 30, 2021 and 2020, the Company recognized income tax provisions of$65.7 million in relation to income before taxes of$281.5 million and$63.5 million in relation to income before taxes of$295.8 million , respectively, resulting in effective tax rates of 23% and 21%, respectively. The higher tax expense for the three months 21 -------------------------------------------------------------------------------- endedSeptember 30, 2021 compared to the same period in the prior year is primarily a result of an increase in state taxes owed and a decrease in tax deductions from stock-based compensation proportionate to pre-tax profits. Nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 Total Revenues The following table compares total revenues for the nine months endedSeptember 30, 2021 and 2020 (in thousands, except percentages): Nine Months Ended September 30, Increase (Decrease) 2021 2020 $ % Rapid Immunoassay$ 676,461 $ 513,578 $ 162,883 32 % Cardiometabolic Immunoassay 203,008 172,902 30,106 17 % Molecular Diagnostic Solutions 149,553 126,533 23,020 18 % Specialized Diagnostic Solutions 32,662 39,452 (6,790) (17) % Total revenues$ 1,061,684 $ 852,465 $ 209,219 25 % For the nine months endedSeptember 30, 2021 , total revenues increased to$1,061.7 million from$852.5 million for the same period in the prior year. The Rapid Immunoassay category was the largest contributor to revenue growth, driven by sales of the QuickVue SARS Antigen and Sofia SARS Antigen assays, partially offset by lower influenza assay sales. Molecular Diagnostic Solutions sales increased$23.0 million , driven by the sales of Lyra SARS-CoV-2 and Solana SARS-CoV-2 assays. Cardiometabolic Immunoassay sales increased$30.1 million as COVID-19 restrictions began to be lifted and sales started to return to pre-pandemic levels. The decrease in Specialized Diagnostic Solutions sales was driven primarily by a decline in demand for cell culture respiratory products as there was no cold and flu season in the first quarter of 2021. Currency exchange rate impact for the nine months endedSeptember 30, 2021 was favorable by$5.9 million , which had a 0.8% impact on the growth rate. Gross Profit Gross profit increased to$781.6 million , or 74% of revenue for the nine months endedSeptember 30, 2021 , compared to$647.4 million , or 76% of revenue for the nine months endedSeptember 30, 2020 . The increased gross profit was due to higher sales volumes in the current period, partially offset by unfavorable product mix, lower selling prices for our SARS products and increased supply chain and other indirect manufacturing costs. Gross margin for the nine months endedSeptember 30, 2021 declined as compared to the same period in the prior year driven primarily by product mix and lower selling prices. Operating Expenses The following table compares operating expenses for the nine months endedSeptember 30, 2021 and 2020 (in thousands, except percentages): Nine
Months Ended
2021 2020
Operating As a % of Operating As a % of Increase (Decrease)
expenses total revenues expenses total revenues $ %
Research and development $ 69,594 7 % $ 58,797 7 % $ 10,797 18 %
Sales and marketing $ 119,111 11 % $ 95,718 11 % $ 23,393 24 %
General and administrative $ 61,758 6 % $ 46,421 5 % $ 15,337 33 %
Acquisition and integration costs $ 1,754 0 % $ 3,175 0 % $ (1,421) (45) %
Research and Development Expense
Research and development expense for the nine months ended September 30, 2021
increased to $69.6 million from $58.8 million for the same period in the prior
year. Development costs for the current period primarily consisted of spending
on the
22
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Savanna instrument and cartridge, QuickVue OTC assay and the related software
applications that enhance the user experience and Sofia SARS and
gastrointestinal assays. The increase was driven primarily by the Savanna
development and spending on clinical trials.
Research and development expense includes direct external costs such as fees
paid to third-party contractors and consultants, and internal direct and
indirect costs such as compensation and other expenses for research and
development personnel, supplies and materials, clinical trials and studies,
facility costs and depreciation.
Sales and Marketing Expense
Sales and marketing expense for the nine months ended September 30, 2021
increased to $119.1 million from $95.7 million for the same period in the prior
year, primarily due to higher product promotional spend associated with the
launch of the QuickVue At-Home OTC COVID-19 Test, higher compensation costs
driven by increased headcount and increased travel, meeting and trade show costs
as COVID-19 related travel restrictions eased.
General and Administrative Expense
General and administrative expense for the nine months ended September 30, 2021
increased to $61.8 million from $46.4 million for the same period in the prior
year due to increased spend on IT projects and higher compensation costs driven
by increased headcount to support the growth of the business.
Acquisition and Integration Costs
Acquisition and integration costs of $1.8 million and $3.2 million for the nine
months ended September 30, 2021 and 2020, respectively, primarily related to the
evaluation of new business development opportunities.
Other Expense, net
The following table compares Other expense, net, for the nine months ended
September 30, 2021 and 2020 (in thousands,
except percentages):
Nine months ended September 30, Increase (decrease)
2021 2020 $ %
Interest and other expense, net $ (4,352) $ (8,071) $ (3,719) (46) %
Loss on extinguishment of debt - (10,384) (10,384) (100) %
Total other expense, net $ (4,352) $ (18,455) $ (14,103) (76) %
Interest and other expense, net primarily relates to accretion of interest on
the deferred consideration, coupon and accretion of interest related to our
Convertible Notes (in the 2020 period) and interest and amortization of deferred
financing costs associated with our Credit Agreement. Interest and other
expense, net for the nine months ended September 30, 2021 decreased to $4.4
million from $8.1 million for the same period in the prior year, primarily due
to the maturity of the Company's Convertible Notes in December 2020 , including
an unfavorable $1.1 million change in fair value of derivative liabilities
associated with a Convertible Notes conversion in the second quarter of 2020.
Additionally, interest expense decreased due to lower deferred consideration
liability outstanding during 2021. Loss on extinguishment of debt of $10.4
million for the nine months ended September 30, 2020 related to the
extinguishment of $5.9 million in aggregate principal amount of the Convertible
Notes, which were converted and settled in cash during the period.
Income Taxes
For the nine months ended September 30, 2021 and 2020, the Company recognized
income tax provisions of $112.1 million in relation to income before taxes of
$525.0 million and $84.6 million in relation to income before taxes of $424.8
million , respectively, resulting in effective tax rates of 21% and 20%,
respectively. The higher tax expense for the nine months ended September 30,
2021 compared to the same period in the prior year is a result of an increase in
state taxes owed and a decrease in tax deductions from stock-based compensation
proportionate to pre-tax profits.
23
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Liquidity and Capital Resources
As of
September 30, December 31,
2021 2020
Cash and cash equivalents $ 578,447 $ 489,941
Amount available to borrow under the Revolving Credit Facility $ 175,000 $ 175,000
Working capital including cash and cash equivalents $
851,977
As ofSeptember 30, 2021 , we had$578.4 million in cash and cash equivalents, a$88.5 million increase fromDecember 31, 2020 . Our cash requirements fluctuate as a result of numerous factors, such as cash generated from operations, progress in research and development or capital expansion projects. In addition, we intend to continue to evaluate candidates for new product lines, company or technology acquisitions or technology licensing. If we decide to proceed with any such transactions, we may need to incur additional debt or issue equity to successfully complete the transactions. Our primary sources of liquidity, other than our holdings of cash and cash equivalents, have been cash flows from operations and our Revolving Credit Facility. Cash generated from operations provides us with the financial flexibility we need to meet normal operating, investing and financing needs. We do not currently expect the impacts of the COVID-19 pandemic to adversely affect our liquidity and capital resources or our ability to meet financial commitments. We anticipate that our current cash and cash equivalents, together with cash provided by operating activities will be sufficient to fund our near-term capital and operating needs for at least the next 12 months. Normal operating needs include the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our primary short-term needs for capital, which are subject to change, include expenditures related to: •acquisitions of equipment and other fixed assets in support of our manufacturing facility expansion; •the continued advancement of research and development efforts; •support of commercialization efforts related to our current and future products, including support of our direct sales force and field support resources; •interest on and repayments of our deferred consideration, contingent consideration and lease obligations; and •potential strategic acquisitions and investments. The Amended and Restated Credit Agreement provides us with a Revolving Credit Facility of$175.0 million and there is no balance outstanding as ofSeptember 30, 2021 . The Revolving Credit Facility matures onAugust 31, 2023 . See Note 5 to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for further discussion of the Revolving Credit Facility. In connection with the acquisition of the BNP Business, the Company has an annual installment payment of$48.0 million payable in 2022 and an annual installment payment of$40.0 million payable in 2023. As ofSeptember 30, 2021 , these payments were recorded at fair value as contingent consideration of$5.8 million and deferred consideration of$77.5 million . OnDecember 12, 2018 , our Board of Directors (the "Board") authorized a stock repurchase program, allowing the Company to repurchase up to$50.0 million of its common stock. OnAugust 28, 2020 , the Board approved an amendment to the stock repurchase program that authorized repurchases of an additional$150.0 million of the Company's common stock throughAugust 28, 2022 . As ofSeptember 30, 2021 , the Company had approximately$52.9 million available under the stock repurchase program. We expect our revenue and operating expenses will significantly impact our cash management decisions. Our future capital requirements and the adequacy of our available funds to service our long-term debt and to fund working capital expenditures and business development efforts will depend on many factors, including: •our ability to realize revenue growth from our new technologies and create innovative products in our markets; •our ability to manage our recent significant growth and facility expansions; •outstanding debt and covenant restrictions; •our ability to leverage our operating expenses to realize operating profits as we grow revenue; 24
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•competing technological and market developments; and •our entry into strategic collaborations with other companies or acquisitions of other companies or technologies to enhance or complement our product and service offerings.
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