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Amid Investor Skepticism, Ortho Clinical Diagnostics CEO Lays Out Merits of Acquisition by Quidel


NEW YORK ─ In the midst of investor skepticism over the impending acquisition of Ortho Clinical Diagnostics by Quidel, Ortho Chairman and CEO Chris Smith said the deal benefits both firms in terms of technology expansion and operational efficiencies.

Since the $6 billion deal was announced in December, both companies' share prices have taken a deep hit, but during Ortho's Q4 conference call on Wednesday, Smith laid out what he sees as the merits of the transaction.

Under the terms of the acquisition, Quidel will pay $24.68 per share of Ortho's common stock, representing a 25 percent premium over Ortho’s closing stock price on Dec. 22. However, in midday trading on the Nasdaq Thursday, Ortho's shares were trading at $16.16, almost 35 percent below the price Quidel is paying for Ortho, and down 18 percent from Ortho's stock price since the deal was announced.

Meanwhile, Quidel's stock has fallen 46 percent on the Nasdaq since the deal's announcement.

According to Smith, some investors may be overlooking the potential of the combined company. With Ortho's strength in clinical laboratories and Quidel's presence in point-of-care testing, "I don't think there's a better deal out there," he said during a conference call to discuss Ortho's Q4 financial results.

Excluding one-time costs, he noted, the combined company is expected to obtain $90 million per year in cost-related synergies by the end of the third year after the acquisition. Cost synergies are expected to be driven primarily by operational efficiencies, supply chain optimization, and shared administrative functions, including public company costs.

Further, removing COVID testing revenues, the combined companies are expected to deliver 9 percent to 11 percent annual revenue growth and generate more than $700 million in annual cash flow, Smith said.

Ortho expects the deal will lead to $100 million in revenue synergies by the end of fiscal 2025, with 80 percent of those synergies coming from the rollout of Quidel's Savannah multiplex real-time PCR testing platform outside the US.

Ortho's global presence can compensate for Quidel's limited test distribution outside the US, Smith said, adding that with the release of Savannah, Ortho's sales team has a molecular system that it can sell for the first time.

The Savannah platform, which is particularly suitable for placement in "mid- to high-throughput labs that are already Ortho's sweet spot," is expected to further diversify the combined company's revenue growth, Smith said.

He believes Ortho can contribute to a more even flow of revenues for the combined company. Historically, Smith said, Quidel's revenues have been heavily tied to the US flu season and recently to COVID-19 testing demand, but Ortho has a more predictable business model that involves stable, reoccurring revenues of 93 percent and usually five- to seven-year contracts with customers.

"The combination of [Ortho's and Quidel's] portfolios position us to be a provider of choice for both centralized and decentralized labs looking for clinical chemistry, immunoassay, and molecular solutions," Smith said.

In the context of an ongoing global pandemic, Quidel has shown strength while COVID-19 assay sales "have not been a meaningful factor" for Ortho, Smith said.

Announcing preliminary Q4 revenues in January, Quidel said it sold approximately 65 million QuickVue COVID-19 antigen tests and more than 4 million Sofia SARS antigen tests. The firm also expanded its installed base of Sofia analyzers to more than 76,000 instruments.

By comparison, Ortho booked $68 million in COVID-19 assay revenue for all of 2021 and expects to book $25 million to $35 million in 2022.

Ortho anticipates that long-term COVID-19 testing volumes will "stabilize at a level that is meaningfully lower than where we are today, [and] when the volumes do stabilize, we expect testing to consist mostly of respiratory panels that includes COVID and flu," Smith said.

The firm is seeing emerging adoption of its COVID-19 antibody assays to test convalescent plasma. "We believe this new growth avenue is meaningful," Smith said. "Longer term, there are multiple studies underway to advance our understanding of COVID immunity, including immunity from infection, immunity from vaccination, as well as immunity from different variants. Notably, we're collaborating with academic and government agencies to develop studies to enable broader clinical utility of our [quantitative] assay."

Unrelated to the acquisition, Ortho expects to grow the total installed base of its instruments by 3.5 percent during 2022 and expects double-digit growth each quarter for its installed base of integrated clinical chemistry and immunoassay instruments.

Ortho's total installed base of instruments grew 3 percent in the quarter. Supply chain challenges impacted transportation costs, labor, manufacturing, and commodities and prevented Ortho from growing its installed base by 5 percent in Q4.

"Like most diagnostic companies, these challenges include shortage of microchips, resins, and certain plastics as well as freight and logistics costs and pressure on pricing," Smith said. "Our management team is working diligently on adding … suppliers, managing the ongoing flow of raw materials, and the distribution challenges."

Smith said upon completion of the acquisition, he will take up an advisory role to the executive team of the combined company and join its board of directors.

"While the transaction is structured as an acquisition of Ortho, these are two similar-sized companies, and the leadership and the employee base will be a mix of both companies," he said.

Quidel CEO Douglas Bryant will become chairman and CEO of the combined company, and Quidel's Robert Bujarski will be president and chief operating officer. Ortho's Joseph Busky will be the CFO, and Ortho's Michael Iskra will be chief commercial officer.

Though the integration process will be complex, the firms have set aside resources to focus on acquisition integration and planning, while the majority of the business leaders in both companies "will stay focused on the execution of our standalone strategies," Smith said.