Executive Summary / Key Takeaways

• QuidelOrtho is undergoing a significant operational and strategic transformation focused on improving profitability and driving sustainable growth following its 2022 merger.
• Recent financial performance shows early signs of success from cost reduction initiatives, contributing to adjusted EBITDA margin expansion despite revenue headwinds from declining COVID-19 testing and the planned U.S. donor screening wind-down.
• The company is targeting substantial adjusted EBITDA margin improvement, aiming for the mid to high 20% range over the next couple of years, supported by ongoing cost savings programs beyond initial staffing reductions, particularly in procurement and operational efficiency.
• A recent strategic pivot in the molecular diagnostics segment involves discontinuing the Savanna platform development in favor of acquiring LEX Diagnostics upon FDA clearance, signaling a focus on accelerating growth in this key market.
• While macroeconomic risks, tariff impacts, and competitive pressures persist, management maintains its full year 2025 guidance, believing mitigation plans and operational improvements are sufficient to offset current headwinds.

A Diagnostics Giant Forged in Merger Navigates a New Era

QuidelOrtho Corporation, formed by the 2022 business combination of Quidel Corporation and Ortho Clinical Diagnostics, stands as a global provider of in-vitro diagnostic technologies. With expertise spanning immunoassay, molecular testing, clinical chemistry, and transfusion medicine, the company's vision is to advance diagnostics to power a healthier future. This strategic merger aimed to leverage the combined strengths of both entities, expanding global infrastructure and commercial reach across more than 130 countries and territories, serving patients across the entire healthcare continuum from point-of-care to centralized labs.

The company manages its business through geographically based reportable segments: North America, EMEA, and China, alongside an 'Other' category. Its diverse portfolio is organized into key business units: Labs, Transfusion Medicine (Immunohematology and Donor Screening), Point of Care, and Molecular Diagnostics, complemented by non-core revenue from contract manufacturing and collaborations.

The post-merger period has been marked by significant integration efforts and strategic adjustments. Challenges included realizing anticipated synergies, supply chain disruptions that impacted instrument placements in 2023 (since resolved), and a substantial non-cash goodwill impairment charge recognized in Q1 2024. Recognizing the need for improved performance and profitability, the company embarked on a strategic refocus under new leadership in 2024, targeting internal cost, execution, and process issues deemed largely within its control.

Central to QuidelOrtho's competitive positioning is its differentiated technology across its diverse portfolio. In the Labs segment, the legacy Ortho dry slide technology offers a unique value proposition, particularly in lower volume settings. This technology is valued for its workflow efficiency and ease of use, complementing the company's immunoassay capabilities. While specific quantitative performance metrics for dry slide technology relative to competitors were not detailed, management emphasizes its role in driving recurring revenue through long-term customer contracts and predictable ordering patterns.

In the Point of Care segment, the Sofia platform holds a leadership position with a large global installed base, known for its rapid diagnostic capabilities, particularly for respiratory assays. The company's success with its COVID-19/Flu combo test highlights the platform's adaptability and market relevance.

The Molecular Diagnostics segment, centered initially around the Savanna platform, has been viewed as an important driver of future profitable growth. The Savanna system was described as offering a compelling value proposition with advantages in workflow (sample to result), rapid turnaround time (<30 minutes), menu expansion potential, and a cost profile positioned well below competitors. R&D efforts have focused on expanding the Savanna menu beyond the approved HSV panel to include a respiratory panel (RVP4), an STI panel, a GI panel, and a syphilis assay, with clinical trials underway and targets for market entry in 2025 for RVP4 and STI. However, in a significant strategic shift announced after the Q1 2025 reporting period (on June 3, 2025), the company decided to discontinue development of the Savanna platform and intends to acquire LEX Diagnostics upon U.S. FDA clearance, signaling a new direction to accelerate growth in molecular diagnostics.

QuidelOrtho operates in a highly competitive environment, facing established global players like Abbott Laboratories (ABT), Roche Holding AG (RHHBY), Danaher Corporation (DHR), and Thermo Fisher Scientific (TMO), as well as smaller, niche competitors. These rivals often possess greater scale, broader portfolios, and deeper R&D capabilities, reflected in their generally higher profitability margins (e.g., Abbott's net margin ~14%, Roche's ~20%, Danaher's ~15%, Thermo Fisher's ~15% in 2023, compared to QuidelOrtho's recent negative GAAP net margins). QuidelOrtho's competitive strategy involves leveraging its differentiated technologies, focusing commercial efforts on attractive market segments, expanding its menu, and improving operational efficiency to enhance its value proposition and cost structure. The planned wind-down of the lower-margin U.S. donor screening business is a direct response to optimize the portfolio's profitability profile.

Performance Reflecting Strategic Adjustments and Market Dynamics

QuidelOrtho's recent financial performance provides insight into the early impacts of its strategic initiatives and the prevailing market conditions. For the first quarter of 2025, total revenues decreased by 3% year-over-year to $692.8 million. This decline was primarily attributed to the expected variability in U.S. respiratory product sales, notably a significant decrease in COVID-19 revenue ($23.4 million in Q1 2025 vs. $50.2 million in Q1 2024), partially offset by strong flu sales. Currency exchange rates also posed a headwind, unfavorably impacting growth by 150 basis points.

Beneath the surface, the performance of core business units showed resilience. The Labs business, a cornerstone of the company's recurring revenue model, grew by 5% year-over-year, driven by solid demand for reagents, consumables, and services. Immunohematology also saw modest growth of 1%, primarily from reagents. As anticipated, the planned wind-down of the U.S. donor screening business resulted in a sharp 62% decline in revenue for this segment. Point of Care revenue, excluding COVID-19, grew 8%, benefiting from a strong flu season, while Molecular Diagnostics saw a 6% increase, driven by higher Savanna revenue from its initial placements.

A key highlight demonstrating the impact of strategic actions was the improvement in profitability. Cost of sales, excluding amortization of intangibles, decreased as a percentage of revenue in Q1 2025 (50.4% vs. 53.3% in Q1 2024), primarily due to procurement-related cost-savings initiatives implemented in 2024. Selling, marketing, and administrative expenses, along with research and development expenses, also decreased year-over-year, reflecting savings from staffing reductions. These operational efficiencies contributed to a 450 basis point year-over-year improvement in adjusted EBITDA margin, reaching 23% in Q1 2025. This marked a significant step towards the company's target of achieving adjusted EBITDA margins in the mid to high 20% range.

Liquidity and capital resources remain a focus, with the company prioritizing debt reduction. As of March 30, 2025, QuidelOrtho held $127.1 million in cash and cash equivalents.

Net cash provided by operating activities in Q1 2025 was $65.6 million, a notable improvement from a slight cash usage in the prior year period, reflecting better operational performance and working capital management despite cash outflows for inventories.

The company utilized its Revolving Credit Facility, with $537.3 million available as of quarter-end, and made payments on long-term borrowings. The net debt to adjusted EBITDA ratio decreased sequentially to 4.2 times, and the consolidated leverage ratio stood at 3.4 times, well within credit agreement covenants.

Management believes current liquidity sources are sufficient to fund near-term needs and plans to refinance its credit facility, maturing in May 2027, in late 2025 or early 2026, market conditions permitting. The strategy to expand instrument placements via reagent rentals is expected to enhance future recurring revenue and cash flows.

Outlook and the Path to Margin Expansion

QuidelOrtho is maintaining its full year 2025 financial guidance, signaling confidence in its strategic execution and ability to manage anticipated headwinds. The company forecasts total reported revenue between $2.6 billion and $2.81 billion. This guidance incorporates an expected COVID-19 revenue contribution of $110 million to $140 million, assuming a seasonal pattern similar to prior years, and excludes the $17 million in government contracts from 2024. It also factors in the planned wind-down of the U.S. donor screening business, expected to contribute $40 million to $50 million in 2025 revenue. Excluding COVID-19 and U.S. Donor Screening, the company anticipates mid-single-digit top-line growth in 2025, with Labs expected to grow in the mid-single digits and Transfusion Medicine (excluding U.S. Donor Screening) in the low single digits.

The core of the 2025 outlook lies in significant profitability improvement. Adjusted EBITDA is projected to be between $575 million and $615 million, translating to an adjusted EBITDA margin of approximately 22% at the midpoint – a 250 basis point improvement over the full year 2024 margin. Adjusted diluted EPS is guided to be between $2.07 and $2.57. These targets are underpinned by the realization of the remaining $50 million of the previously announced $100 million annualized cost savings in the first half of 2025. Furthermore, the company expects incremental cost savings of $30 million to $50 million in 2025, primarily from expanded procurement and operational efficiency initiatives, which are in addition to any tariff-related offsets.

The company is actively addressing potential macroeconomic and geopolitical risks, particularly the evolving tariff situation. While estimating a potential gross tariff impact of $30 million to $40 million in 2025, management is confident that mitigation plans – including changing source materials, repositioning inventory, shifting suppliers, selective pricing actions, and additional cost reductions – are sufficient to fully offset these headwinds and maintain the financial guidance.

Challenges in the China market, including anti-corruption policies causing delays in instrument placements and potential changes to cardiac product reimbursement in certain provinces, are being closely monitored. While these dynamics introduce complexity and have led to some near-term timing shifts in revenue (e.g., Q2 2025 China revenue expected lower year-over-year due to delayed shipments, shifting to the second half), management believes the China business remains solid with more potential upside than risk for the full year, still expecting mid to high single-digit growth in the region.

The pathway to the targeted mid to high 20% adjusted EBITDA margin over the next couple of years relies on a combination of continued cost discipline, leveraging operational efficiencies, and driving revenue growth from core businesses and new product introductions. The recent strategic shift in molecular diagnostics, moving from internal Savanna development to the planned acquisition of LEX Diagnostics, represents a significant change in the approach to capturing growth in this dynamic market. While the specifics of the LEX technology and its integration are yet to be fully detailed, this pivot underscores the company's commitment to accelerating its molecular strategy and positioning itself competitively against rivals like Roche and Danaher in the molecular point-of-care space.

Key risks to monitor include the successful execution of the extensive cost savings and efficiency initiatives, the performance and market adoption of new products (including the outcome of the new molecular strategy), the impact of respiratory season variability, ongoing litigation, and the ability to navigate complex international markets and macroeconomic pressures. The material weaknesses in internal control over financial reporting, though not impacting the fair presentation of Q1 2025 financials, also require diligent remediation.

Conclusion

QuidelOrtho is in a transitional phase, actively reshaping its operational and financial profile following a major merger. The core investment thesis centers on the company's ability to execute its strategic plan, particularly in realizing significant cost savings and driving margin expansion towards competitive benchmarks. Early results from Q1 2025 indicate positive momentum from these efforts, providing a foundation for the ambitious 2025 guidance and the longer-term margin targets. While facing headwinds from declining COVID-19 revenue, the planned exit from a lower-margin business, and external macroeconomic factors, the company's focus on operational efficiency, portfolio optimization, and strategic pivots – such as the recent shift in its molecular diagnostics approach – positions it to potentially unlock value. Investors should closely monitor the execution of cost reduction programs, the success of the new molecular strategy, and the company's ability to sustain growth in its core Labs and Immunohematology businesses amidst a competitive and dynamic global diagnostics market.