NEW YORK ─ In more than six years as a private company under the ownership of the private equity firm the Carlyle Group, Ortho Clinical Diagnostics invested heavily to reinvigorate its portfolio of diagnostic instruments and assays.
But now that it has gone public, the Raritan, New Jersey-based pure-play diagnostics firm believes it can turbocharge its goals and plans to use the funds amassed from its recent IPO to pay down debt, continue to fund new product development, and achieve greater operational efficiencies.
In so doing, the firm hopes to be in a better position to drive future revenue and earnings growth.
Post-IPO, the firm is already better positioned to keep pace with competitors and is looking to shrewdly invest in R&D with the aim to launch new assays for its integrated immunoassay and clinical chemistry analyzers, Michael Iskra, executive vice president of strategy at the firm, said in an interview.
Ortho expects that the IPO funding will also enable it to pursue business activities such as M&A that were not possible as a private company because of its high level of debt, Iskra added.
Overall, many of Ortho's investments, current and past, support a single strategic objective, maximizing "lifetime customer value, which starts with retaining all customers," Iskra said. The average lifetime of an Ortho customer is greater than 13 years, and the company wants to increase it. Lifetime customer value "underpins everything it does," including the design and execution of its commercial and service model, instrument and assay innovation, all the way to the composition of its global footprint, the company has said.
In 2014 the Carlyle Group took Ortho private after acquiring it from J&J for approximately $4 billion. J&J reportedly sold Ortho because it was performing below expectations.
In the in vitro diagnostic products market, Ortho faces steep competition from firms including Roche, Danaher, Abbott, and Siemens Healthineers that have product portfolios that reach beyond the clinical laboratory and translation medicine segments addressed by Ortho.
For example, the company does not market molecular diagnostic instruments or tests, the go-to testing modality for SARS-CoV-2 detection. And though Ortho has received Emergency Use Authorization from the US Food and Drug Administration for a laboratory-based serology test and recently entered the area of active SARS-CoV-2 infection detection with the launch of a high-throughput antigen assay that is suitable for mass testing, its business has taken a hit from a downturn in its core testing markets during the pandemic.
Mainly because of that, the firm is likely to post a year-over-year drop in revenues for 2020, according to Piper Sandler, one of four investment banks to initiate coverage of Ortho on Monday.
Ortho has not yet released financial results for 2020, but the investment bank believes that the diagnostics company will book net revenue of $1.76 billion in 2020, down about 3 percent year-over-year. The bank also anticipates a rebound in Ortho's revenue growth in 2021, with revenues expected to rise almost 6 percent to $1.86 billion.
"Ortho Clinical is well positioned in attractive end markets with ample room to grow organically by global expansion, especially in the faster growing regions of China, [Asia-Pacific, and Latin America]," Piper Sandler analyst Steven Mah wrote in a research note on Monday. Its lifetime customer value growth strategy involves adapting and growing with its customers as they move from lower throughput to higher-throughput automation and new products, such as integrated chemistry and immunoassay systems, he added.
Ortho sells its products to customers in the two largest in vitro diagnostics markets ─ immunoassay and clinical chemistry ─ which together consist of its clinical laboratories business and represent an approximately $24 billion addressable market, the firm said in its Form-S1 filed with the US Securities and Exchange Commission. The firm focuses on sales to medium- and high-volume laboratories and markets its products globally through a network of distributors.
Its second business segment, transfusion medicine, includes hospital-based immunohematology and donor screening for blood and plasma at hospitals and other donation centers. That represents an approximately $2 billion current addressable market, according to Ortho.
Iskra said he believes that the path from being part of J&J, then becoming a standalone private company, and now being publicly traded has set Ortho up for future success.
In the years after going private, he noted, Ortho invested heavily in information technology, supply chain, and other business infrastructure projects. It invested more than $500 million in information technology, finance, supply chain, and other support functions to build out its infrastructure and capabilities as a standalone business and drive long-term, profitable growth, the firm said.
As part of J&J, Ortho had been using many of the larger company's internal business systems, "so a significant amount of investment while we were private went into building our own," Iskra said. "We're committed to continually looking at everything we do and finding a way to do it more efficiently. As we save money, some of that will drop to the bottom line but some will also be invested back into product innovation and other commercial initiatives."
In its Form-S-1, the company said that since 2014, it redesigned its go-to-market strategy, expanded its sales force, and implemented new customer information systems. It also "consolidated and streamlined its manufacturing capabilities and other global functions to improve profitability and cash flow, and achieve more than $200 million in savings since its acquisition by Carlyle," the firm said.
Additionally, after going private, Ortho invested about $550 million in R&D to improve its capabilities and develop new instruments and assays to supplement its portfolio. The company has launched "75 new or improved assays," in that time, Iskra said, adding that some were developed to fill a gap it may have had with its competitors.
Unable to participate in M&A with high debt under the Carlyle Group, Ortho instead focused on developing strategic partnerships and it continues to do so, Iskra said, noting that in 2017, for example, it inked a deal with Thermo Fisher Scientific to develop Thermo's procalcitonin assay for use on Ortho's Vitros systems.
The IPO completed in January had been on Ortho's strategic drawing board for some time, but by mid-summer last year, "seeing the opportunity to raise capital and execute while the markets are good," it decided to accelerate its plans, Iskra said.
Mainly, the firm wanted to continue to fund its most important internal initiatives and leverage capital markets to do so, he added.
Though Ortho's products are marketed in more than 130 countries, its main focus has been on marketing and sales in the US and China, and the firm sees an opportunity to further expand in Europe, the Middle East, and Africa region, as well as in other developed and emerging markets, Iskra said.
Though he declined to elaborate on specific plans for new products, Iskra noted that the company is closely monitoring point-of-care diagnostic testing and molecular diagnostic testing as adjacent areas to its current business that hold potential.
Additionally, he cited the recent EUA for a laboratory-based, high-throughput antigen test for SARS-CoV-2 as an example of a product that it has recently developed and represents the company's entry into testing for active SARS-CoV-2 infections. With Ortho's tests normally using blood or urine samples with its analyzers, the antigen test is the first Ortho product to use nasopharyngeal swab specimens.
The SARS-CoV-2 antigen assay runs on its laboratory-based, high-throughput Vitros analyzers ─ high-volume Vitros systems are installed in more than 5,600 laboratories worldwide, including 1,500 labs in the US.
Ortho is starting to see the impact of the antigen assay for hospitals, which account for 70 percent of all its customers, Iskra said. Among its customers, community hospitals that had previously been sending out samples for laboratory-based PCR testing have begun using the antigen assay in their laboratories and realizing time and cost savings, he added.
With the uptake of testing during the pandemic, there "has probably never been a better time to be in diagnostics," Iskra said.
And with that increased awareness, Ortho has not been alone among diagnostics companies going public this year. Last week, point-of-care infectious disease diagnostics company Talis Biomedical closed its initial public offering, and earlier in February, Lucira Health went public.
Still, compared to diagnostic company IPOs in recent years, Ortho's initial public offering cannot be characterized as "wildly successful," Robert Boorstein, medical director of Brooklyn-based Lenco Diagnostic Laboratory, said in an interview. The share prices of some diagnostic companies with less mature products have done better in the immediate aftermath of their IPOs, he said.
Additionally, going forward, the firm may be at a disadvantage because its product portfolio is narrow compared to some of its "strong competitors," ─ companies that manufacture point-of-care tests and molecular diagnostic tests as well as other products currently outside Ortho's scope, Boorstein said.
Though Ortho has an early mover advantage with its laboratory-based antigen test for SARS-CoV-2, Boorstein noted that the assay is not unique. DiaSorin and Roche have also developed such assays for high-throughput platforms, though they currently have not been authorized for use by the FDA. Siemens Healthineers on Tuesday announced that it has obtained CE marking for its laboratory-based SARS-CoV-2 Antigen Assay, and it has submitted the test to the FDA for EUA.
Boorstein also is skeptical about the utility of rapid antigen tests for detecting COVID-19, saying it appears "the vast majority of schools, universities, and hospitals are not using antigen testing to clear people" as negative for SARS-CoV-2. "I think there is a general feeling that molecular testing is the gold standard, and asymptomatic people are not going to be detected by antigen testing," he said.