qdel-20230101
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________
FORM 10-K
(Mark One)
For the fiscal year ended January 1, 2023
ORFor the transition period from _____ to _____
Commission file number: 001-41409
QUIDELORTHO CORPORATION
(Exact name of registrant as specified in its charter)
9975 Summers Ridge Road, San Diego, California92121
(Address of principal executive offices, including zip code)
858-552-1100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, $0.001 par value QDEL The Nasdaq Stock Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☒No☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes☐No☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $6,008,202,595 based on the closing sale price at which the common stock was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter.
As of February 10, 2023, 66,505,546 shares of the registrant’s common stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
(To the Extent Indicated Herein)
Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission in connection with the registrant’s 2023 Annual Meeting of Stockholders (scheduled to be held on May 16, 2023) are incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on Form 10-K.
QUIDELORTHO CORPORATION
FORM 10-K
FOR THE FISCAL YEAR ENDED JANUARY 1, 2023
TABLE OF CONTENTS
Page
Future Uncertainties and Forward-Looking Statements 4
Part I
Item 1. Business 5
Item 1A. Risk Factors 26
Item 1B. Unresolved Staff Comments 52
Item 2. Properties 52
Item 3. Legal Proceedings 53
Item 4. Mine Safety Disclosures 53
Part II
Item 6. [Reserved] 55
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 69
Item 8. Financial Statements and Supplementary Data 71
Item 9A. Controls and Procedures 114
Item 9B. Other Information 117
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 117
Part III
Item 10. Directors, Executive Officers and Corporate Governance 118
Item 11. Executive Compensation 118
Item 14. Principal Accountant Fees and Services 118
Part IV
Item 15. Exhibits and Financial Statement Schedules 119
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Future Uncertainties and Forward-Looking Statements
This Annual Report on Form 10-K (this “Annual Report”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Without limiting the foregoing, the words “may,” “will,” “would,” “should,” “might,” “expect,” “anticipate,” “believe,” “estimate,” “plan,” “intend,” “goal,” “project,” “strategy,” “future,” “continue,” or similar words, expressions or the negative of such terms or other comparable terminology are intended to identify forward-looking statements. These statements include any statements contained herein that are not statements of historical fact, including, but not limited to, certain statements under Part I, Item 1, “Business,” Part I, Item 1A, “Risk Factors,” and Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and located elsewhere herein, regarding our commercial, integration and other strategic or sustainability-related goals, industry prospects, expected results of operations or financial position, and future plans, objectives, strategies, expectations and intentions. Such statements are based on the beliefs and expectations of our management as of the date of this Annual Report and are subject to significant risks and uncertainties. Actual results or outcomes may differ significantly from those set forth or implied in the forward-looking statements. The following factors, among others, could cause actual results to differ from those set forth or implied in the forward-looking statements: the challenges and costs of integrating, restructuring and achieving anticipated synergies as a result of the Combinations (as defined in this Annual Report); the ability to retain key employees; and other economic, business, competitive and/or regulatory factors affecting our business generally, including those discussed under Part I, Item 1A, “Risk Factors.” Investors should not rely on forward-looking statements as predictions of future events because these statements are based on assumptions that may not come true and are speculative by their nature. We have no obligation to update any of the forward-looking information or time-sensitive information included in this Annual Report, whether as a result of new information, future events, changed expectations or otherwise, except as required by law. All forward-looking statements are based on information currently available to us and speak only as of the date of this Annual Report.
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Part I
Item 1. Business
All references to “the Company,” “we,” “our” and “us” in this Annual Report refer to QuidelOrtho Corporation (“QuidelOrtho”) and its subsidiaries. References to “fiscal year 2022” in this Annual Report refer to the Company’s fiscal year ended January 1, 2023.
Overview
Our mission is to develop and manufacture intelligent diagnostic solutions that transform the power of diagnostics into a healthier future for everyone. Our expertise in immunoassay and molecular testing, clinical chemistry and transfusion medicine helps clinicians and patients make better informed decisions across the globe. Our global infrastructure and commercial reach support our customers across more than 130 countries and territories with quality diagnostics, a broad test portfolio and market-leading service. We operate globally with manufacturing facilities in the U.S. and U.K. and with sales centers, administrative offices and warehouses located throughout the world.
We currently sell our products directly to end users through a direct sales force and through a network of distributors, for professional use in physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies, wellness screening centers, other point-of-care (“POC”) settings, blood banks and donor centers, as well as for individual, non-professional, over-the-counter (“OTC”) use. We reached significant new markets as we introduced our QuickVue® At-Home OTC COVID-19 test for at-home consumer use, school districts, health departments and many other locations.
On May 27, 2022, pursuant to a Business Combination Agreement entered into as of December 22, 2021 (the “BCA”), by and among Quidel Corporation (“Quidel”), Ortho Clinical Diagnostics Holdings plc (“Ortho”), QuidelOrtho (formerly Coronado Topco, Inc.), Orca Holdco, Inc., Laguna Merger Sub, Inc. (“U.S. Merger Sub”), and Orca Holdco 2, Inc., Quidel and Ortho consummated a business combination (the “Combinations”) by way of (i) a scheme of arrangement undertaken by Ortho under Part 26 of the U.K. Companies Act 2006 (the “Ortho Scheme”), pursuant to which each issued and outstanding share of Ortho was acquired by a nominee of QuidelOrtho, such that Ortho became a wholly owned subsidiary of QuidelOrtho, and (ii) a merger of U.S. Merger Sub with and into Quidel, with Quidel surviving the merger as a wholly owned subsidiary of QuidelOrtho. The High Court of Justice of England and Wales (the “Court”) sanctioned the Ortho Scheme on May 26, 2022 and a sealed order of the Court was delivered to the Registrar of Companies at Companies House on May 27, 2022, satisfying the final condition to closing of the Combinations.
Beginning in the second quarter of 2022, in connection with the Combinations and in order to manage our business to better align with the market dynamics of the specific geographic regions in which we operate, we changed the manner in which we review our performance and allocate resources. As a result, we changed from one reportable segment to the following three geographically-based reportable segments: North America; Europe, the Middle East and Africa (“EMEA”); and China. Latin America, Japan and Asia Pacific are immaterial operating segments that are not considered reportable segments and are included in “Other.” We generate our revenue primarily in the following business units: Labs, Transfusion Medicine, Point of Care and Molecular Diagnostics. Information concerning revenues attributable to our reportable segments and business units is set forth in Note 4 and Note 5 to the Consolidated Financial Statements.
Business Units and Products
In connection with the Combinations, we reorganized our former product categories into four business units. Revenues from our former Specialized Diagnostic Solutions product category have been included in a new Labs business unit described below. Our former Rapid Immunoassay and Cardiometabolic Immunoassay product categories now represent our Point of Care business unit. The Molecular Diagnostics business unit represents the former Molecular Diagnostic Solutions product category. In addition, we added a Transfusion Medicine business unit.
We provide diagnostic testing solutions under various brand names, including, among others, the following: AdenoPlusTM, BIOVUE®, D3®, ELVIRA®, ELVIS®, FastPoint®, FreshCellsTM, InflammaDry®, Lyra®, MicroVueTM, Ortho®, Ortho Clinical Diagnostics®, Ortho VisionTM, Quidel®, QuickVue, QuickVue+®, QVueTM, ReadyCells®, Savanna®, Sofia®, Solana®, Thyretain®, Triage®, Virena® and Vitros®. Solely for convenience, in some cases, the trademarks, service marks and trade names referred to in this Annual Report are listed without the applicable ® and TM symbols, but we will assert, to the fullest extent under applicable law, our rights to these trademarks, service marks and trade names.
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Following the Combinations, we generate product revenue in the following business units:
Business Unit Focus
Other product revenues primarily from contract manufacturing
Specialized diagnostic solutions
Tests that are run on a range of portable, POC analyzers
Tests that are visually read
The products and platforms under each business unit are described below. Certain products and platforms are not available in all regions where we do business.
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LABS
Product Primary Application
Specialty Products Variety of biomarkers for bone health
• high-quality results quickly, efficiently and economically;
• improved storage, with longer shelf life and less shelf space required;
• 40% greater test throughput when using XT slides;
• 96% first-pass yield on test results; and
Testing Menu
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MOLECULAR DIAGNOSTICS
Product Primary Application
Testing Menu
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POINT OF CARE
Product Primary Application
Rapid Immunoassay
Cardiometabolic Immunoassay
Testing Menu
Cardiac BNP, Creatine Kinase-MB, D-Dimer, hsTroponin, Myoglobin, Troponin I ES
Eye Health Acute Conjunctivitis, MMP-9 (a key inflammatory marker for dry eye)
Inflammatory Lactoferrin
Oncology Colorectal Cancer
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TRANSFUSION MEDICINE
Product Primary Application
Immunohematology
Donor Screening
Services and Informatics
In addition to the products we provide, our services and informatics are a critical element of how we deliver value to our customers. As of January 1, 2023, we had approximately 1,000 service teammates globally. We employ highly trained service professionals, including laboratory specialists with advanced qualifications.
Our highly valued suite of ORTHOCARE service offerings includes:
•Guarantee 98% up-time to our e-connected U.S. customers−High instrument reliability and a proactive maintenance program.
•E-CONNECTIVITY Remote Monitoring Software−More than 80% of our installed base of VITROS 5600, XT 7600 and ORTHO VISION platforms are e-connected, enabling remote monitoring and improved analyzer availability.
•Laboratory Informatics−Solutions designed to deliver incremental value to the laboratory, including inventory planning, laboratory productivity metrics and technical documentation.
•ValuMetrix−A highly valued consulting service proven to increase laboratory workflow, productivity and laboratory service levels utilizing lean principles and process excellence. This service offering provides actionable insights into demand for new products, services and workflow.
•Global Technical Solution Center−Seven technical solution centers delivering first-line support in over 15 languages, meaning we can resolve service issues remotely without an on-site visit approximately two-thirds of the time.
•Smart Service Mobile App−First-in-class technology enabled on iPhone and Android devices that allows our service teams to receive up-to-date analyzer health checks, proactive alerts and performance monitoring to help ensure the highest level of reliability is achieved.
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•Training and Education−Flexible educational resources for the lifetime of the customer relationship, including virtual technical training, continuing education and professional development.
•Smart Start−Concierge implementation program led by certified project managers. Easier implementation using collaborative software to keep up to date with real-time progress reports, customized dashboards and status updates.
•Merged Reality−Enables product experts to provide remote ‘side by side’ assistance to field service engineers and customers through mobile devices, including smart glasses. This allows both parties to see the same thing at the same time and provide guided instruction leading to better and faster fix rates.
We also provide our Virena wireless cellular data management and surveillance system that operates as a cloud-based solution connecting Sofia and Solana instruments across a healthcare system and automatically transmitting de-identified test results to a secure database. With Virena, a health system, physician office laboratory (“POL”), urgent care center or retail clinic has the ability to compile, analyze, map and generate reports of de-identified test results, improving operational efficiencies, quality and patient outcome initiatives.
Digital Solutions and Innovation
We are developing a growing portfolio of digital and data solutions, which we believe improve our customers’ clinical and operational outcomes. Our focus is on enabling our customers to deliver smart, connected care across various clinical environments. We strive to turn our instruments into data assets for healthcare providers, labs and policymakers through proprietary and third-party connectivity solutions, such as laboratory information systems and middleware partnerships and connectivity to our information systems. Building on this interoperability, we offer a number of solutions to simplify and automate the testing and instrument management process, including ORTHO Connect, Ortho Plus and Virena. We also plan to develop other digital solutions that turn test results into specific clinical insights and actions via physician or patient facing solutions, such as the QVue mobile application for COVID-19 at-home testing.
Our Strategic Capabilities and Competitive Strengths
There is significant competition in the development and marketing of IVD products, and innovation, product development, regulatory clearance to market and commercial introduction of new IVD technologies can occur rapidly. We believe that some of the most significant competitive factors in the rapid diagnostic market include convenience, speed to result, specimen flexibility, product menu, clinical needs, price, reimbursement levels, product performance and customer service, as well as effective distribution, advertising, promotion and brand recognition. The competitive factors in the central laboratory market are also significant and include price, product performance, reimbursement, compatibility with routine specimen procurement methods, and manufacturing products in testing formats that meet the workflow demands of larger volume laboratories. There are several global companies with whom we compete, as well as regional and local companies focused on particular markets and/or technologies. Our principal competitors include, among others, Abbott Laboratories, Thermo Fisher Scientific, Danaher, Siemens Healthineers, Diasorin, Bio-Rad, Hologic, Qiagen, bioMérieux and PerkinElmer. Some of these competitors have substantially greater financial, marketing and other resources than we have.
We believe we are well positioned to drive sustained and profitable growth through an ethos of customer-centric decision making and behavior, which informs everything we do from product development to commercial execution. This disciplined focus on serving customers has resulted in, and we believe will continue to create, a business model that can deliver profitable growth and shareholder returns. The cash we generate allows us to reinvest in and reinforce our competitive strengths and strategic capabilities, which then benefit from our global footprint to enable us to be a leader across profitable and high-growth market segments. The competitive strengths that serve as our foundation of success today and can drive future growth include four key aspects, all of which benefit from our talented people and loyal customers:
1.Superior customer experience and brand loyalty. Over our more than 80 years supporting the IVD testing needs of our customers, we have developed deep and enduring relationships with our customers. Our ORTHOCARE service program allows us to retain and grow our customer base by providing an industry-leading customer experience driven by quality of service, continuous innovation and access to a diverse product portfolio.
2.Innovation and research and development (“R&D”) capabilities that address unmet needs in new and existing market segments. We intend to continue to invest in the next generation of instrumentation for each of our business units while keeping abreast of emerging technologies and use-cases, some of which may lead to new business units or revenue streams. Our key strengths include new assay format development, new instrument systems development and the complex integration of the two. In addition, to create new opportunities, manage costs and adapt to a rapidly changing industry, we also enter into strategic partnerships as part of our R&D process.
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3.Operational scale driven by recent investments in U.S. manufacturing capabilities and an extensive and balanced global commercial footprint across more than 130 countries. We leverage our global footprint of approximately 2,800 commercial sales, service and regional marketing teammates to facilitate successful delivery of innovative solutions to meet our customers’ needs in both developed and emerging markets.
4.Leadership team dedicated to preserving a culture of employee focus and happiness. We understand that our success relies upon the talent and dedication of our employees. That is why we are committed to attracting, retaining and developing the best talent in the industry. Our culture puts our team members first and prioritizes actions that support happiness, inspiration and engagement. We strive to build meaningful connections with each other as we believe that employee happiness and business success are symbiotic.
Strategy
We are driven to transform diagnostics into action for more people in more places. As we look to the future, we see many opportunities for continued growth. In the short term, our strategy is to invest in R&D to offer a broader test menu to more settings for more patients. Both routine and novel tests are important for leveraging our large and growing installed base of instruments in both laboratories and POC settings. We have also entered the at-home testing market and see opportunities to benefit from additional at-home tests, such as for the flu and RSV.
Additionally, we have made investments to design and develop solutions that are intended to drive laboratory automation and efficiency, improve access to new and novel diagnostics, and enable patients and providers to experience the full benefits of a remote and digitized healthcare system. For example, with the onset of the COVID-19 pandemic, physicians and patients experienced a rapid shift to telemedicine and at-home testing. Going forward, we believe it is important to continue to build digital capabilities and solutions into our offerings to take advantage of this trend and our expectations that it will continue to emerge and evolve.
Longer term, we intend to continue to invest in areas with unmet clinical needs. We are aware of additional markets in which we do not yet compete, but that may benefit from our R&D capabilities and larger operational scale. We also plan to continue to explore the technology and content landscapes for strategic assets. Given the rapid pace of change and deep expertise needed within some of these areas, we expect to leverage third-party partnerships and acquisitions to reduce some of the technical and commercial risks and potentially increase our speed to market with innovative offerings.
As a result of the Combinations, we have increased leverage, cash and optionality. We intend to use a portion of such cash for additional R&D investments. We may also pursue potential business development opportunities, partnerships and acquisitions to support our strategic initiatives. We intend to pursue strategic opportunities that could result in new and relevant technologies and capabilities, or accelerate our commercial growth in attractive end-markets and geographies. We expect to maintain a disciplined approach to inorganic growth.
Current initiatives to execute on this strategy include the following:
•develop and deliver products that represent significant market opportunities, and compete effectively in market segments where service and quality are important;
•focus our R&D efforts;
•leverage our large direct sales team to enhance our cross-selling capabilities across our four business units, and strengthen our relationships with integrated delivery networks, laboratories and hospitals;
•continue to invest in our digital health solutions, including our mobile applications, to expand into new and growing markets; and
•pursue potential acquisitions to support our strategic initiatives.
Research and Development
We continue to focus our R&D efforts on the following areas:
•creation of new and improved products for use on our installed base;
•development of new proprietary product platforms for all of our business units; and
•pursuit of collaboration with other companies for new and existing products and markets.
We balance our R&D efforts against our R&D team’s capacity, development timelines and overall cost. Our R&D team is comprised of a balanced mix of experienced professionals with years of experience in the diagnostics industry and recently trained technologists, and together, they have know-how and technical capabilities in key areas, such as biomedical science, information technology (“IT”) and engineering. Key strengths of our team include new assay format development, new
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instrument systems development and the complex integration of the two. In addition, in order to create new opportunities, manage costs and adapt to a rapidly changing industry, we also plan to enter into strategic partnerships as part of our R&D process.
R&D expenses were $190.5 million for fiscal year 2022, which includes the impact of Ortho’s operations from the date of the Combinations. R&D expenses were $95.7 million, and $84.3 million for fiscal years 2021 and 2020, respectively. We anticipate significant investment of our financial resources to product and technology R&D in the foreseeable future.
Sales, Marketing and Distribution
Our current business strategy is designed to serve the continuum of healthcare delivery needs globally, from POC clinicians located in doctor’s office practices, to moderately complex POLs, and to highly complex hospitals, laboratories and blood and plasma centers. We are also increasingly prioritizing retail and online outlets, such as large pharmacies, to market and distribute our QuickVue At-Home OTC COVID-19 tests. Within the inherent operational diversity of these various segments, we focus on differentiating ourselves and enhancing our market leadership by specializing in the diagnosis and monitoring of select disease states, conditions and wellness categories.
Certain of our revenue is driven by a “razor/razor blade” business model. Through this model, we generally sell or place instruments under long-term contracts, which support the ongoing sale of our assays, reagents and consumables. Our instruments are closed systems, requiring customers to purchase the assays, reagents and consumables from us. These sales generate a high proportion of our recurring revenues.
Our sales team is comprised of highly skilled and experienced professionals. We sell products globally and market and distribute products worldwide in a variety of ways, including through a mix of direct, indirect and hybrid distribution strategies. Across our global footprint, we operate a region-specific sales model. Our developed markets, specifically in North America and Western Europe, are served primarily through direct sales; however, we generally utilize a combination of direct sales and third-party distributors in emerging markets, such as China, Asia Pacific, the Middle East, Africa, Eastern Europe and Latin America, as we believe this model is more commercially effective in those regions. Our primary distribution centers are located in North America and Europe.
In North America, we use a generalized sales force for each of our business units other than for donor screening within Transfusion Medicine, which utilizes a separate specialist sales force. Our North America distribution strategy takes into account the highly fragmented POC market, with many small or medium-sized customers. To reach customers using POC diagnostic tests, a network of national and regional distributors is employed, as well as our own sales force. We have expanded the size of our North America sales force in the past few years. This sales force works closely with our key distributors to drive market penetration of our products.
In Europe, our employees support sales and marketing activities in key countries, such as Germany, Italy, France and the U.K. In addition, we have created shared service centers in Galway, Ireland, Prague, Czech Republic and Strasbourg, France to support general and administrative, technical support and customer service functions in Europe.
In the Asia Pacific region, which includes China, Japan and India, our employees support sales and marketing activities, primarily for the Point of Care, Labs and Transfusion Medicine business units. In addition, we have created shared service centers in Shanghai, China and Hyderabad, India to support general and administrative, technical support and customer service functions.
In Latin America, our employees support sales and marketing activities in key countries, such as Brazil and Mexico.
Our global team strives to deliver best-in-class customer service and support by surrounding our customers with devoted and experienced professionals. Our call center team and laboratory specialists serve as the first line of contact for our customers and are available to provide customer training and ongoing customer support. In addition, our network of field engineers is responsible for installing our instruments and providing onsite customer support if necessary.
Our marketing strategy is focused on ensuring that our key product portfolios are supported by clinical validation and health economic and outcomes research that show that our tests deliver fast, high-quality results, are cost-effective to use with lower total cost of ownership, and improve patient outcomes. Our marketing strategy also focuses on effectively marketing to customers a differentiated value proposition and maintaining our brand strength as further discussed above in the section entitled “Our Strategic Capabilities and Competitive Strengths.”
We derive a significant portion of our total revenues from a few customers and distributors. Two of our customers, including one of our distributors, which is considered to be among the market leaders, exceeded 10% of our total revenues for fiscal year 2022. In fiscal year 2021, one distributor exceeded 10% of our total revenues. In fiscal year 2020, four of our distributors exceeded 10% of our total revenues. See Note 4 to the Consolidated Financial Statements.
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Manufacturing
Our manufacturing operations benefit from our broad global footprint, scale and workforce capabilities. We believe our plant capacity and available space are sufficient to accommodate growth, maintain quality and help ensure continuity. Our primary manufacturing facilities are located in San Diego, California, Carlsbad, California, Athens, Ohio, Raritan, New Jersey, Rochester, New York, Pompano Beach, Florida, Pencoed, Wales and Galway, Ireland.
Our McKellar Court, San Diego, California and our Carlsbad, California lateral flow manufacturing facilities consist of laboratories devoted to tissue culture, cell culture, protein purification or immunochemistry, and production areas dedicated to manufacturing and assembly. In the manufacturing process, biological and chemical supplies and equipment are used. We have invested in a high degree of automated equipment for the assembly and inspection processes. These facilities operate under a Quality Management System (“QMS”) per International Organization for Standardization (“ISO”) standard and regulatory regulations. These facilities are certified to ISO 13485:2016 and Medical Device Single Audit Program (“MDSAP”) medical device standards. Many of the immunoassay products manufactured at these facilities are packaged and shipped by a local third party.
Our Summers Ridge, San Diego, California facility consists of laboratories that are involved in mammalian cell culture, bacterial fermentation, protein purification and modification, as well as other techniques involved in immunoassay reagent manufacturing. These reagents are used in the manufacture of devices made at this facility and some are also supplied to Beckman as key active ingredients for BNP products that run on Beckman analyzers. In addition, this facility has production areas dedicated to creating and processing plastic components that are subsequently transformed into finished devices (cardiac and drugs of abuse products) using customized manufacturing equipment, including specialized automation. This facility is certified to ISO 13485:2016 and MDSAP medical device standards. Most of the products are packaged and subsequently distributed by our San Diego distribution center.
Our Athens, Ohio facility consists of a variety of clean room and chemistry laboratories and customized reagent filling and packaging areas to support the manufacturing at the facility of all products under current good manufacturing practices (“cGMPs”). This facility supports the manufacturing of our molecular nucleic acid amplification products, our living tissue cell culture and antibody-based products, as well as our enzyme linked immunosorbent assays (ELISA). We use a wide variety of biological and chemical supplies in our manufacturing processes. We also utilize specialized equipment for the lyophilization of reagents, cell culture growth, protein purification and a variety of automation for dispensing of antibodies, reagents and solutions. This facility is certified to ISO 13485:2016 and MDSAP medical device standards. Packaging, warehousing and shipping logistics with cold chain storage capability are handled at this facility.
Our Raritan, New Jersey facility manufactures our in vitro diagnostic donor screening and immunohematology products that are distributed globally. Manufacturing processes consist of formulation, filtration, filling, labeling, chemistry analysis, serological and microbial testing, as well as packaging. The product filling process occurs in a microbially controlled filling area using highly automated equipment and systems. This facility is a CBER licensed biologics/510(k) facility, certified to ISO 13485 and MDSAP medical device standards, ISO14001:2015, Environmental Management System, and the OSHA Voluntary Protection Program (“VPP”) Star Site. This facility is recognized for environmental stewardship by the New Jersey Department of Environmental Protection. Warehousing, direct shipping and shipping logistics with cold chain storage capability are handled at this facility with products transported to our distribution facilities for onward handling to end customers.
Our Rochester, New York facility consists of three sites for slide manufacturing, fluid manufacturing and CNP equipment manufacturing. This facility manufactures the slides and fluids used for clinical diagnostic assays run on our VITROS analyzers. Manufacturing capabilities include formulation, lyophilization, filling, coating, slitting, custom featuring, assembly and packaging, all under cGMPs. This facility is certified to ISO 13485:2016 and MDSAP medical device standards and ISO 14001 and is part of the OSHA VPP program for safety. Warehousing and shipping logistics with cold chain storage capability are handled at this facility with products transported to our distribution facilities for onward handling to end customers.
Our Pompano Beach, Florida facility manufactures our immunohematology CAT products that are distributed to the North American market, encompassing the U.S., Canada and Puerto Rico. The manufacturing processes include subassembly activities required for reagent formulation, product filling, chemistry analysis, serological testing and product packaging. The product filling process occurs in a microbially controlled filling area using highly automated, state-of-the-art equipment and systems. This facility is a CBER licensed biologics/510(k) facility, certified to ISO 13485 and MDSAP medical device standards, ISO 14001 and ISO 45001. Warehousing and shipping logistics with cold chain storage capability are handled at this facility with products transported to our distribution facilities for onward handling to end customers.
Our Pencoed, Wales facility manufactures certain of our immunoassay and immunohematology products that are distributed globally. The immunoassay manufacturing processes include conjugation, purification, biological formulation, lyophilization, dispensing, testing and packaging. The processes are highly automated with state-of-the-art systems and key processes are executed in an environmentally controlled area. By utilizing electronic batch records, each product is manufactured with high quality and consistency. This facility is certified to ISO 13485 and MDSAP medical device standards, ISO 14001 and ISO
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45001. Warehousing and shipping logistics with cold chain storage capability are handled at this facility with products transported to our distribution facilities for onward handling to end customers.
Our Galway, Ireland facility manufactures in vitro diagnostic test kits. This facility also provides sales and technical support and warehouses and distributes products from many of our manufacturing locations into the EMEA markets. This facility operates under and is certified to ISO 13485:2016.
We seek to conduct our manufacturing in compliance with QMS regulatory requirements of the U.S., Australia, Brazil, Canada, Japan, Europe, South Korea and certain other countries. Our manufacturing facilities have passed routine regulatory inspections confirming compliance with the QMS regulatory requirements. Our facilities are registered with various regulatory bodies, including the FDA and other international and local public health and regulatory agencies.
Suppliers and Raw Materials
We obtain raw materials from reputable outside suppliers and believe our business relationships with them are good. Some of our raw materials are available from a limited number of sources. During 2022, we encountered some increasing pressures on raw material pricing. To help mitigate these supply chain challenges, we are (i) partnering with suppliers to invest in additional capacity and raw material inventory, (ii) diversifying our supply base, where possible, to minimize reliance on a single source of supply for key raw materials and components and (iii) creating redundancy in our global supply chain. In addition, we routinely evaluate our supply chain for potential gaps and continue to take other steps intended to help address continuity. For more information related to our supply chain, see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Impact of the COVID-19 Pandemic—Supply Chains,” Part I, Item 1A, “Risk Factors—Risks Relating to Our Business, Strategy and Operations—The COVID-19 global pandemic has adversely affected, and may continue to adversely affect, our business operations, strategy, financial performance and results of operations, the extent of which is uncertain and difficult to predict” and Part I, Item 1A, “Risk Factors—Risks Relating to Our Business, Strategy and Operations—Interruptions and delays in the supply of raw materials, components, equipment and other products and services could adversely affect our operations and financial results.”
Collaboration Arrangements
We have various collaboration arrangements, which provide us with the rights to develop, produce and market products using certain know-how, technology and patent rights maintained by our collaborative partners. These arrangements are often entered into in order to share risks and rewards related to a specific program or product. Our collaborative arrangements include a number of ongoing relationships for test development, instrument development and automation track design and distribution.
In connection with the Combinations, we acquired the ongoing collaboration arrangement (the “Joint Business”) between Ortho and Grifols Diagnostic Solutions, Inc. (“Grifols”), under which Ortho and Grifols agreed to pursue a collaboration relating to Ortho’s Hepatitis and HIV diagnostics business. The arrangement is governed by an agreement (as amended, the “Grifols Agreement”) originally entered into in 1989 with a 50-year term, which, among other things, provides for a profit sharing arrangement whereby, the profits we generate from our production and sale of Hepatitis and HIV diagnostics products are shared with Grifols, and the profits generated by Grifols from its sale of certain antigens and licensing of certain intellectual property rights are shared with us. The Grifols Agreement also gives us the right to use such intellectual property. The majority of the patents underlying these intellectual property rights have expired. Grifols also supplies us with a portion of the antigens used in its production of these diagnostics products.
Today, the most significant benefit to us under the Grifols Agreement is the manufacture and sale by us of HIV and Hepatitis tests, which are solely performed by us. During the fiscal year ended January 1, 2023, the revenue associated with the use of this patented intellectual property was less than 1% of our total revenues and the expense associated with the antigens supplied to us by Grifols was less than 2% of our cost of goods sold.
The initial 50-year term of the Grifols Agreement will expire on December 31, 2039, at which time it will automatically renew for successive five-year periods unless either party has notified the other at least five years in advance of such date that it wishes to terminate the Grifols Agreement. Notwithstanding the initial term, in Europe, the Grifols Agreement will terminate on a country-by-country basis upon the expiration of the last patent right with respect to such country, provided that either party has a right to extend the Grifols Agreement for successive one-year terms by giving the other party notice prior to the termination date. To date, the parties have extended the Grifols Agreement for Europe on an annual basis. The Grifols Agreement may also be terminated by the non-breaching party if there is a breach or default of the agreement which is not cured during a 60-day cure period.
Seasonality
Sales of our respiratory products are subject to, and significantly affected by, the seasonal demands of the cold and flu seasons, typically prevalent during the fall and winter. Historically, sales of our influenza products have varied from year to year in
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volume and timing based, in large part, on the severity, length and timing of the onset of the cold and flu season. In addition, the SARS-CoV-2 virus may have similar seasonal demands and impacts on our revenues in the future.
Government Regulations
U.S. Regulations of Medical Devices
The testing, manufacture and commercialization of the majority of our diagnostics products and analyzers in the U.S. are subject to regulation by numerous governmental authorities, principally the FDA as medical devices and corresponding state regulatory agencies. Pursuant to the U.S. Federal Food, Drug, and Cosmetic Act (the “FDCA”) and the regulations promulgated thereunder, the FDA regulates the preclinical and clinical testing, manufacture, labeling, distribution and promotion of medical devices.
In the U.S., medical devices are classified into one of three classes (Class I, II or III) depending on the degree of risk associated with each medical device and the extent of manufacturer and regulatory control needed to ensure its safety and effectiveness. Class I devices are those with the lowest risk to the patient and are those for which safety and effectiveness can be assured by adherence to the FDA’s General Controls for medical devices, which include compliance with the applicable portions of cGMPs for medical devices known as the Quality System Regulation (“QSR”) facility registration and product listing, reporting of adverse medical events, and truthful and non-misleading labeling, advertising and promotional materials. Class II devices are subject to the FDA’s General Controls, and special controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device, like performance standards, post-market surveillance, patient registries and FDA guidance documents. Class III devices generally pose the highest risks, such as life sustaining, life supporting or some implantable devices, and are typically subject to premarket approval to ensure their safety and effectiveness. Our current products are all Class I or II.
While most Class I devices are exempt from the premarket notification requirement under Section 510(k) of the FDCA (“510(k)”), manufacturers of most Class II devices are required to submit to the FDA a premarket notification under 510(k) requesting permission to commercially distribute the device. The FDA’s permission to commercially distribute a device subject to a 510(k) premarket notification is generally known as 510(k) clearance, which can be a lengthy, expensive and uncertain process. The FDA has been requiring more rigorous demonstration of product performance as part of the 510(k) process, including submission of extensive clinical data. It generally takes from three months to one year to obtain clearance, but may take longer. A premarket approval (“PMA”) application must be supported by valid scientific evidence to demonstrate the safety and effectiveness of the device, typically including the results of clinical investigations, bench tests and reference laboratory studies. In addition, modifications or enhancements for existing products that could significantly affect their safety or effectiveness or constitute a major change in the intended use of the device, will require new submissions to the FDA. Class III devices require approval of a PMA application evidencing safety and effectiveness of the device. We currently market the majority of our diagnostic products in the U.S. pursuant to 510(k) clearances and PMA approvals.
The FDA can authorize the emergency use of an unapproved medical product or an unapproved use of an approved medical product, referred to as emergency use authorization (“EUA”), for certain emergency circumstances after the Secretary of the U.S. Department of Health and Human Services (“HHS”) has made a declaration of emergency justifying authorization of emergency use. An EUA allows use in an emergency to diagnose, treat or prevent serious or life-threatening diseases or conditions caused by emerging infectious disease threats when there are no adequate, approved and available alternatives. The FDA may also waive otherwise applicable cGMPs requirements to accommodate emergency response needs. Products subject to an EUA must still comply with the conditions of the EUA, including labeling and marketing requirements. Moreover, the authorization to market products under an EUA is limited to the period of time the public health emergency declaration is in effect as determined by HHS. On February 4, 2020, the HHS Secretary determined that the novel coronavirus presented a public health emergency that has a significant potential to affect national security or the health and security of U.S. citizens living abroad and declared that circumstances existed justifying the authorization of emergency use of in vitro diagnostics for detection and/or diagnosis of the novel coronavirus that causes COVID-19. All of our current products for testing for the COVID-19 virus are sold in the U.S. under EUA.
The FDA’s Clinical Laboratory Improvement Amendment of 1988 (“CLIA”) regulates laboratory testing and requires clinical laboratories to be certified by their state, as well as the Centers for Medicare & Medicaid Services (“CMS”), before diagnostic testing can be conducted. Laboratories using our assays must obtain a CLIA certificate. Waived testing is designated by CLIA as simple testing that carries a low risk for an incorrect result. The CLIA-waived designation is critical for most of our products that are intended for POC settings. The FDA’s current guidance entitled “Guidance for Industry and FDA Staff: Recommendations for Clinical Laboratory Improvement Amendments of 1988 CLIA Waiver Applications for Manufacturers of In Vitro Diagnostic Devices” sets forth requirements for obtaining a CLIA waiver, which are onerous and have increased the time and cost we are required to spend to obtain a CLIA waiver.
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Any devices we manufacture or distribute pursuant to FDA clearance or approvals are subject to continuing regulation by the FDA and certain state agencies, including adherence to QSR relating to testing, control, documentation and other quality assurance requirements. We must also comply with Medical Device Reporting requirements, which mandates reporting to the FDA of any incident in which a device may have caused or contributed to a death or serious injury, or in which a device malfunctioned and, if the malfunction were to recur, would be likely to cause or contribute to a death or serious injury. Labeling and promotional activities are also subject to scrutiny by the FDA and, in certain circumstances, by the Federal Trade Commission (“FTC”). Current FDA enforcement policy prohibits the marketing of approved medical devices for unapproved uses.
U.S. Regulation of Biological Products
Certain of our blood screening products are regulated by the FDA as biological products, also called biologics. In the U.S., biologics are subject to regulation under the FDCA and the Public Health Service Act (“PHSA”), and other federal, state, local and foreign statutes and regulations. The process required by the FDA before biologics may be marketed in the U.S. generally involves the following:
•completion of preclinical laboratory tests and animal studies performed in accordance with the FDA’s Good Laboratory Practice requirements;
•submission to the FDA of an Investigational New Drug application (“IND”) which must become effective before human clinical trials may begin. An IND is a request for authorization from the FDA to administer an investigational new drug product to humans;
•approval by an Institutional Review Board or ethics committee at each clinical site before the trial is commenced;
•performance of adequate and well-controlled human clinical trials to establish the safety, purity and potency of the proposed biologic product candidate for its intended purpose;
•preparation of and submission to the FDA of a Biologics License Application (“BLA”) after completion of all pivotal clinical trials;
•satisfactory completion of an FDA Advisory Committee review, if applicable;
•a determination by the FDA within 60 days of its receipt of a BLA to file the application for review;
•satisfactory completion of an FDA pre-approval inspection of the manufacturing facility or facilities at which the proposed product is to be produced to assess compliance with cGMPs and to assure that the facilities, methods and controls are adequate to preserve the biological product’s continued safety, purity and potency, and of selected clinical investigation sites to assess compliance with Good Clinical Practices; and
•FDA review and approval of the BLA to permit commercial marketing of the product for particular indications for use in the U.S.
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, the results of product development, nonclinical studies and clinical trials are submitted to the FDA as part of a BLA requesting approval to market the product for one or more indications. The BLA must include all relevant data available from preclinical and clinical studies, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls, and proposed labeling, among other things. The submission of a BLA requires payment of a substantial application user fee to the FDA, unless a waiver or exemption applies.
After the FDA evaluates a BLA and conducts inspections of manufacturing facilities where the investigational product and/or its drug substance will be produced and of select clinical trial sites, the FDA may issue an approval letter or a Complete Response Letter (“CRL”). An approval letter authorizes commercial marketing of the product with specific prescribing information for specific indications. In issuing the CRL, the FDA may recommend actions that the applicant might take to place the BLA in condition for approval, including requests for additional information or clarification. The FDA may delay or refuse approval of a BLA if applicable regulatory criteria are not satisfied, require additional testing or information and/or require post-marketing testing and surveillance to monitor safety or efficacy of a product.
If regulatory approval of a product is granted, such approval will be granted for particular indications and may entail limitations on the indicated uses for which such product may be marketed. The FDA also may condition approval on, among other things, changes to proposed labeling or the development of adequate controls and specifications. Once approved, the FDA may withdraw the product approval if compliance with pre- and post-marketing requirements is not maintained or if problems occur after the product reaches the marketplace. The FDA may require one or more post-market studies and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization and may limit further marketing of the product based on the results of these post-marketing studies.
Any biologics manufactured or distributed pursuant to FDA approvals are subject to pervasive and continuing regulation by the FDA, including, among other things, requirements relating to record-keeping, reporting of adverse experiences, periodic
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reporting, product sampling and distribution, and advertising and promotion of the product. After approval, most changes to the approved product, such as adding new indications or other labeling claims, are subject to prior FDA review and approval. There also are continuing, annual program fees for any marketed products. Biologic manufacturers and their subcontractors are required to register their establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for compliance with cGMP, which impose certain procedural and documentation requirements upon us and our third-party manufacturers. Changes to the manufacturing process are strictly regulated, and, depending on the significance of the change, may require prior FDA approval before being implemented. FDA regulations also require investigation and correction of any deviations from cGMP and impose reporting requirements upon us and any third-party manufacturers that we may decide to use. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.
FDA Enforcement
The FDA may withdraw a marketing authorization if compliance with regulatory requirements and standards is not maintained or if problems occur after the product reaches the market. Later discovery of previously unknown problems with a product, including adverse events of unanticipated severity or frequency, or with manufacturing processes, or failure to comply with regulatory requirements, may result in revisions to the approved labeling to add new safety information, imposition of post-market studies or clinical studies to assess new safety risks, or imposition of distribution restrictions or other restrictions. Other potential consequences include, among other things: restrictions on the marketing or manufacturing of the product, complete withdrawal of the product from the market, product recalls, fines, warning letters, untitled letters, clinical holds on clinical studies, refusal of the FDA to approve pending applications or supplements to approved applications, product seizures or detention, refusal to permit the import or export of products, consent decrees, corporate integrity agreements, the issuance of corrective information, injunctions, or the imposition of civil or criminal penalties.
In addition, the FDA closely regulates the marketing, labeling, advertising and promotion of biologics and medical devices. A company can make only those claims relating to safety and efficacy, purity and potency that are cleared or approved by the FDA and in accordance with the provisions of the authorized label. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses. Failure to comply with these requirements can result in, among other things, adverse publicity, warning letters, corrective advertising and potential civil and criminal penalties.
Regulations Outside of the U.S.
For marketing outside the U.S., we are subject to foreign regulatory requirements governing human clinical testing and marketing approval for our products. These requirements vary by jurisdiction, differ from those in the U.S., and may require us to perform additional or different preclinical or clinical testing regardless of whether we have obtained FDA clearance or approval. The amount of time required to obtain necessary approvals varies from that required for FDA clearance or approval. In many foreign countries, pricing and reimbursement approvals are also required.
Our initial focus for obtaining marketing approval outside the U.S. is typically in the European Union (“EU”), Australia, Brazil, Canada, China, Japan and the U.K. EU regulations and directives generally classify healthcare products either as medicinal products, medical devices or IVD. In order for medical devices to be placed on the European market or put into service, they must bear a CE marking. The CE marking may only be affixed if the product meets the essential safety and performance requirements. Manufacturers must establish a specific quality management system that ensures that a risk management procedure and a clinical evaluation are carried out for each device. The conformity assessment usually involves an audit of the manufacturer’s quality system by a notified body accredited by an EU member state and, depending on the type of device, a review of the technical file from the manufacturer on the safety and performance of the device. In some other cases, the notified body must seek a scientific opinion from specific expert panels or the European Medical Agency before issuing a CE certificate.
In addition, the EU has adopted the EU Medical Device Regulation (EU 2017/745) (the “EU MDR”) and the In Vitro Diagnostic Regulation (EU 2017/746) (the “EU IVDR”), each of which impose stricter requirements for the marketing and sale of medical devices than in the U.S., including in the area of clinical evaluation requirements, quality systems and post-market surveillance. The compliance deadlines for the EU MDR and EU IVDR were May 2021 and May 2022, respectively. The transition period provided for in the EU MDR for existing certifications issued under the previous Medical Devices Directive will end on May 26, 2024. The EU IVDR has been applicable since May 26, 2022. In January 2022, the European Parliament and the Council adopted a staggered extension of its transition period, ranging from May 26, 2025 for high risk in vitro diagnostics to May 26, 2027 for lower risk in vitro diagnostics, and to May 26, 2028 for certain provisions concerning devices manufactured and used in health institutions (Regulation (EU) 2022/112). However, the transition periods might still be subject to change.
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Complying with these regulations may require us to incur significant expenditures. Failure to meet these regulatory requirements could adversely impact our business in the EU and other regions that tie their product registrations to the EU requirements.
Chinese regulations require registration of diagnostic products with China’s National Medical Products Administration (“NMPA,” formerly CFDA), including NMPA’s Announcement (No. 104, 2020), which provides an accelerated pathway for the localization of imported medical devices and IVD products in China by permitting (for certain classes or products) the same medical approval license previously approved by the mainland authorities to apply to provincial domestic enterprises in China, providing for the same product design and equivalent quality system that is traceable to the imported licensed product. Additional clinical trials in China are typically required for registration purposes. ISO certification is included in applications for registration to NMPA. Japanese regulations require registration of IVD products with the Japanese Ministry of Health, Labor and Welfare. For products marketed in Canada, registration is required with Health Canada. For products marketed in the U.K., approvals must be obtained from the U.K.’s Medicine and Healthcare Products Regulatory Agency. For products marketed in Australia, registration is required with the Therapeutic Goods Administration. IVD products in Brazil are regulated by the Agencia Nacional de Vigilancia Sanitaria. For our products marketed in Canada, Japan, Brazil, Australia and the U.S., the MDSAP is a single regulatory audit of our QMS that satisfies the requirements of all five of these jurisdictions.
Other Healthcare Laws
Our products are subject to various healthcare-related laws regulating fraud and abuse, R&D, pricing, sales and marketing practices, and the privacy and security of health information. Among other things, these laws and others generally (a) prohibit the provision of anything of value in exchange for the referral of patients or for the purchase, order, or recommendation of any item or service reimbursed by a federal healthcare program, including Medicare and Medicaid; (b) require that claims for payment submitted to federal healthcare programs be truthful; and (c) require the maintenance of certain government licenses and permits. Specific health-care laws and regulations that we are subject to include:
•the federal Physician Self-Referral Law, which prohibits a physician from making referrals for certain designated health services payable by Medicare to an entity with which he or she (or an immediate family member) has a financial relationship, and prohibits the entity from presenting or causing to be presented claims to Medicare for those referred services;
•the federal Anti-Kickback Statute, which prohibits, among other things, persons or entities from soliciting, receiving, offering or providing remuneration, directly or indirectly, where one purpose is to induce either the referral of an individual for, or the purchase order or recommendation of, any item or services for which payment may be made under a federal healthcare program such as Medicare and Medicaid. The U.S. government has interpreted this law broadly to apply to the marketing and sales activities of medical device manufacturers;
•the federal civil and criminal false claims laws, including the False Claims Act (“FCA”), which prohibits, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from Medicare, Medicaid or other federal healthcare programs that are false or fraudulent. Moreover, the government may assert that a claim including items or services resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim for purposes of the FCA;
•the federal Civil Monetary Penalties Law, which prohibits, among other things, offering or transferring remuneration to a federal healthcare beneficiary that a person knows or should know is likely to influence the beneficiary’s decision to order or receive items or services reimbursable by the government from a particular provider or supplier;
•the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), which, in addition to privacy protections applicable to healthcare providers and other entities, prohibits, among other things, executing a scheme to defraud any healthcare benefit program and making false statements relating to healthcare matters.
•the federal Physician Payments Sunshine Act which requires certain applicable manufacturers of drugs, devices, biologics and medical supplies for which payment is available under certain federal healthcare programs, to monitor and report to CMS, certain payments and other transfers of value to physicians (defined to include doctors, dentists, optometrists, podiatrists and chiropractors), certain other healthcare providers, including physician assistants and nurse practitioners, and teaching hospitals, as well as ownership and investment interests held by physicians and their immediate family members;
•the FDCA, which prohibits, among other things, the adulteration or misbranding of drugs, biologics and medical devices, and regulates device marketing;
•U.S. federal consumer protection and unfair competition laws, which broadly regulate marketplace activities that potentially harm customers; and
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•state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws, which may apply to item or services reimbursed by any third-party payor, including commercial insurers; state laws requiring device companies to comply with specific compliance standards, restrict payments made to healthcare providers and other potential referral sources, and report information related to payments and other transfers of value to healthcare providers or marketing expenditures and state laws related to insurance fraud in the case of claims involving private insurers.
Data Privacy and Security Laws
We are subject to data privacy and security laws and regulations in numerous jurisdictions, as well as customer-imposed controls, as a result of having access to and processing confidential, personal and/or sensitive data in the course of our business. Specific data privacy and security laws that we are subject to include:
•HIPAA, which imposes, among other things, certain standards relating to the privacy, security, transmission and breach reporting of individually identifiable health information. Certain states have also adopted comparable privacy and security laws and regulations, some of which may be more stringent than HIPAA;
•the California Consumer Privacy Act of 2018 (“CCPA”), which creates individual privacy rights for California consumers and increases the privacy and security obligations of entities handling certain personal information. Further, the California Privacy Rights Act, which amends the CCPA, became operative on January 1, 2023 and imposes additional data protection obligations on covered businesses, including additional consumer rights processes, limitations on data uses, new audit requirements for certain higher risk data processing, and opt outs for certain transfers of personal information and uses of sensitive data. It also created a new California data protection agency authorized to issue substantive regulations, which are in the process of finalization, and could result in increased privacy and information security enforcement. A similar law in Virginia also took effect January 1, 2023, and similar laws also have passed in other states, including Colorado, Utah, and Connecticut. Comprehensive privacy laws also have been proposed in other states and at the federal level, reflecting a trend toward more stringent privacy legislation in the U.S.;
•the FTC Act, and state consumer protection laws, enforced by many state Attorneys General for online collection, use, dissemination and security practices that appear to be unfair or deceptive;
•outside the U.S., the General Data Protection Regulation 2016/679 (the “GDPR”) and the U.K. data protection regime consisting primarily of the U.K. General Data Protection Regulation and the U.K. Data Protection Act 2018 (collectively, the “U.K. GDPR”), which govern the processing of information in those jurisdictions, and could result in significant fines (up to the greater of €20 million / £17.5 million or 4% of total annual revenue), regulatory investigations, reputational damage, orders to cease or change our processing of our data, enforcement notices or assessment notices (for a compulsory audit), civil claims including representative actions and other class action type litigation;
•E.U. and U.K. rules with respect to cross-border transfers of personal data out of the European Economic Area (the “EEA”) and the U.K., respectively, which are in flux, including in light of a decision by the Court of Justice of the E.U. invalidating the E.U.-U.S. Privacy Shield Framework, and the European Commission’s recent publishing of revised standard contractual clauses, which we must now consider and apply, where applicable. In light of these changing requirements, we could suffer additional costs, complaints, regulatory investigations or fines, and if we are otherwise unable to transfer personal data between and among countries and regions in which we operate, it could affect the manner in which we provide our services and the geographical location or segregation of our relevant systems and operations, which could adversely affect our financial results, including because we rely on third parties in other countries;
•evolving privacy laws on cookies and e-marketing. In the E.U., regulators are increasingly focusing on compliance with requirements in the online behavioral advertising ecosystem, and current national laws that implement the ePrivacy Directive will be replaced by an E.U. regulation known as the ePrivacy Regulation which will significantly increase fines for non-compliance. While the text of the ePrivacy Regulation is still under development, a recent European court decision and regulators’ recent guidance are driving increased attention to cookies and tracking technologies. In the U.S., the FTC and many state laws have increasingly focused on the collection and use of behavioral data, including geolocation and biometric information. As regulators start to enforce a stricter approach, this could lead to substantial costs, require significant systems changes, limit the effectiveness of our marketing activities, divert the attention of our technology personnel, adversely affect our margins, increase costs and subject us to additional liabilities;
•China’s multiple pieces of legislation governing the healthcare industry involve prescribing complex regulatory requirements governing different types of data across a continuum of care, and various supervisory authorities frequently conduct inspections and investigations. These include:
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◦China’s Cybersecurity Law, including data localization requirements that require operators of critical information infrastructure (“CIIOs”) to store personal information and important data collected and generated from the critical information infrastructure within China. Failure to do so can result in fines of up to RMB 100,000 for the relevant entity as well as for the personnel directly responsible;
◦China’s Data Security Law (“Data Security Law”), which became effective on September 1, 2021, and applies extraterritorially and to a broad range of activities that involve “data” (not only personal or sensitive data). Under the Data Security Law, entities and individuals carrying out data activities must abide by various data security obligations, including implementing the appropriate level of protective measures for each respective class of data and storing data locally in China (or in compliance with certain data transfer restrictions);
◦China’s Personal Information Protection Law (“PIPL”), which is similar to the GDPR and also applies extraterritorially. The PIPL provides the legality of personal information processing and the basic requirements of notice and consent, sets out data localization requirements for CIIOs and personal information processors who process personal information above a certain threshold prescribed by the relevant authorities, and provides a list of rules for transferring personal information outside of China. Failure to comply with PIPL can result in fines of up to RMB 50 million or 5% of the prior year’s total annual revenue for the personal information processor and/or a suspension of services or data processing activities, among other fines and criminal liabilities, including ones that can be placed on responsible personnel; and
◦several regulations and draft regulations for public comments, promulgated by the People’s Republic of China, which are designed to provide further supplemental guidance in accordance with the laws mentioned above;
•self-regulatory standards that privacy advocacy groups, the technology industry and other industries have established or may establish and various new, additional or different self-regulatory standards that may place additional burdens on us. Our customers may expect us to meet voluntary certifications or adhere to other standards established by them or other third parties, and we may be required or otherwise find it advisable to obtain certain of these certifications or adhere to these standards. If we are unable to maintain these certifications or meet these standards, it could reduce demand for our solutions and adversely affect our business; and
•enacted or considered legislation similar to the above in other countries around the world, in which we do business.
Environmental, Health and Safety Laws
We are subject to various environmental, health and safety laws and regulations both within and outside the U.S., such as those related to safe working conditions and laboratory practices. Like other companies in our industry, our manufacturing and research activities involve the purchase, storage, movement, use and disposal of substances regulated under environmental, health and safety laws, including those related to hazardous or potentially hazardous substances.
Laws Governing Reimbursement Activities
Healthcare providers that purchase medical devices generally rely on third-party payors, including the Medicare and Medicaid programs and private payors, such as indemnity insurers, employer group health insurance programs and managed care plans, to reimburse all or part of the cost of the products. As a result, demand for our products is and will continue to be dependent in part on the coverage and reimbursement policies of these payors. Reimbursement from Medicare, Medicaid and other third-party payors may be subject to periodic adjustments as a result of legislative, regulatory and policy changes as well as budgetary pressures in the U.S. and globally. For example, in the U.S.:
•the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act (collectively, the “PPACA”) implemented payment system reforms including a national pilot program on payment bundling to encourage hospitals, physicians and other providers to improve the coordination, quality and efficiency of certain healthcare services through bundled payment models;
•the Budget Control Act of 2011 reduced Medicare payments to providers by 2% per fiscal year, effective on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect through 2030, with the exception of a temporary suspension from May 1, 2020, through March 31, 2022, unless additional Congressional action is taken;
•the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), enacted in 2015, repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual
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updates and a new system of incentive payments that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations; and
•certain provisions of the Protecting Access to Medicare Act of 2014 (“PAMA”) were implemented by CMS in 2018, which made substantial changes to the way in which clinical laboratory services are paid under Medicare. Under PAMA, the revised Medicare reimbursement rates were scheduled to apply to clinical diagnostic laboratory tests furnished on or after January 1, 2018. The revised reimbursement methodology is expected to generally result in relatively lower reimbursement under Medicare for clinical diagnostic lab tests than has been historically available. Any reduction to payment rates resulting from the new methodology is limited to 10% per test per year in 2018 through 2020, and to 15% per test per year in 2021 through 2023.
Other Laws and Regulations Governing Our Sales, Marketing, and Shipping
We are subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), the U.K. Bribery Act of 2010 (the “Bribery Act”), the Brazilian Anti-Bribery Act (also known as the Brazilian Clean Company Act) and various other similar anti-corruption and anti-bribery laws. Among other things, these laws generally prohibit us and our intermediaries from offering, promising or making payments to foreign government entities or officials for the purpose of obtaining or retaining business. We are also subject to pertinent U.S. and foreign laws relating to the import and export of finished goods, raw materials and supplies. We also must comply with various export control and trade embargo laws, which may require licenses or other authorizations for transactions within some countries or with some counterparties. Additionally, we are subject to laws and regulations and certain environmental, social and governance (“ESG”) requirements applicable to our government contracts, and failure to address these laws and regulations, ESG requirements, or to comply with government contracts could result in fines, debarment or exclusion from federal healthcare or global tender programs, or harm our business by a reduction in revenue associated with these customers. We are also subject to audits for compliance with the regulations governing government contracts. A failure to comply with these regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.
Intellectual Property
The healthcare industry has traditionally placed considerable importance on obtaining and maintaining patent, trade secret and trademark protection for commercially relevant technologies, devices, products, tradenames and processes. In the aggregate, our intellectual property is of material importance in the operation of our business. However, although we possess numerous patents, trade secrets and trademarks that are important to our business, we believe that no single patent, trade secret or trademark by itself is material to our business as a whole.
We actively pursue patents for technologies that are considered patentable. We have issued patents in the U.S. and internationally, and have patent applications pending throughout the world. However, important factors, many of which are not within our control, can affect whether and to what extent patent protection in the U.S. and in other important markets worldwide is obtained. For example, the speed, accuracy and consistency in application of the law in a patent office within any particular jurisdiction are beyond our control and can be unpredictable. The resolution of issues such as these and their effect on our long-term success are also indeterminable.
It has been our policy to file for patent protection in the U.S. and other countries with significant markets for our products, such as Western European countries and Japan, if the economics are deemed to justify such filing and our patent counsel advises that relevant patent protection may be obtained.
A large number of individuals and commercial enterprises seek patent protection for technologies, products and processes in fields in, or related to, our areas of product development. To the extent such efforts are successful, we may be required to obtain licenses and pay royalties (some of which may be significant) in order to exploit certain of our product strategies. Moreover, licenses to such patents may not be available to us at all or may not be available on acceptable terms.
We are aware of certain patents issued to various developers of diagnostic products with potential applicability to our diagnostic technologies. We have entered into agreements with third parties to license and use their intellectual property, although no one such license is material to our business as a whole. In the future, we expect that we will require or desire additional licenses from other parties in order to refine our products further and to allow us to develop, manufacture and market commercially viable or superior products effectively.
In addition to seeking patent protection where appropriate, we also protect some of our intellectual property as trade secrets. We seek to protect our trade secrets and proprietary technologies in many ways, including by entering into confidentiality agreements with employees and third parties with which we do business (such as potential licensees, customers, vendors, strategic partners and consultants). In addition, we have implemented certain security measures in our laboratories and offices to protect the confidential and proprietary nature of these technologies.
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In addition to patent and trade secret protection, we have also registered or applied to register certain trademarks and service marks in the U.S. and in foreign countries that are used in our business and in conjunction with the sale of our products. Our principal trademarks and the products they cover are discussed above in the section entitled “Business Units and Products.”
Under many of our contractual agreements that involve the sale of our products, we have agreed to indemnify the counterparty against costs and liabilities arising out of any patent infringement claims and other intellectual property claims asserted by a third party relating to our products sold under those agreements.
Human Capital and ESG Strategies
Human Capital Resources
As of January 1, 2023, we had approximately 7,000 employees worldwide, with approximately 4,200 employees in the U.S. and approximately 2,800 employees outside of the U.S. We employ approximately 1,700 manufacturing employees and approximately 2,800 employees in commercial sales, service and regional marketing positions worldwide, including approximately 1,000 service teammates. Approximately 15% of our associates globally are covered by a union, collective bargaining agreement or works council, including associates in Austria, Belgium, Brazil, France, Germany, Italy, Spain, Sweden and the U.K. To date, we have experienced no work stoppages and believe that our employee relations are good.
Diversity, Equity and Inclusion
Our employees are one of our most important assets and set the foundation for our ability to achieve our strategic objectives, drive operational execution, deliver strong financial performance, advance innovation, and maintain our quality and compliance programs. The success and growth of our business depend in large part on our ability to attract, retain, develop and motivate a diverse population of talented and high-performing employees at all levels of our organization. We strive to provide a positive work environment for all employees, consultants, contingent workers, vendors, and customers. One of the ways we accomplish this is by embracing a variety of diverse experiences and perspectives and being inclusive team players. We are dedicated to fostering a culture that supports diverse talents, experiences and perspectives and an environment of mutual respect, equity and collaboration that helps drive our business. As a global organization, our unique perspectives, diverse backgrounds and collective strengths drive creative solutions, breakthrough innovation and highly productive teams.
In September 2022, we invited all of our employees to participate in a confidential, global survey to gather feedback and gain insights on key cultural and engagement factors. Nearly 75% of global employees participated in the survey, and results show positive sentiment around engagement and workplace culture. Respondents indicated a strong alignment to our strategic priorities and found meaning and purpose in their work. We believe we are stronger together and will prioritize actions that support happy, inspired and engaged team members. We plan to conduct periodic pulse surveys with employees throughout 2023 to measure progress and focus on continuous improvement.
We are committed to maintaining an environment of equal employment opportunities for all job applicants and members of our team. We fulfill this commitment through a variety of measures, including internal and external posting of job openings, hiring, training and promoting employees without regard to race, color, religion, gender identity or expression, pregnancy, national origin, ancestry, citizenship, military or veteran status, disability, medical condition, marital or domestic partner status, sexual orientation, age or any other considerations made unlawful by federal, state or local law. We prohibit discrimination based on a perception that anyone has any of these characteristics or is associated with a person who has or is perceived as having any of these characteristics. In keeping with our core values, we are steadfast in taking action to provide equal employment opportunity in accordance with all applicable federal, state and local laws.
In addition, we review Company programs, policies, procedures and activities with diversity and inclusion in mind. We have established newly defined core behaviors based on the QuidelOrtho Way, which define our core values as a company and our ways of working together. These core behaviors include “bring your best,” which reflects each individual contributing to their highest potential, “embrace inclusion,” which reinforces the role each team member plays in creating a diverse, equitable and inclusive work environment, and “commit to service,” which reflects our value of serving our customers and communities in the core of everything we do. We plan to expand upon the foundation of diversity and inclusion by incorporating other inclusive behaviors into these core behaviors and providing training to support all of our employees in being authentic in their self-expression and open to the self-expression of others.
As of January 1, 2023, 43% of our U.S. employees identified as female and 39% of our U.S. employees identified as having a racial and ethnic background other than white. As of January 1, 2023, our executive management team consisted of 8 members, of whom 25% identified as female. In addition, as of January 1, 2023, our board of directors (the “Board”) consisted of 12 members, of whom 25% identified as female and 17% identified as having a racial and ethnic background other than white.
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Employee Benefits
To succeed in a competitive labor market, we have recruitment and retention strategies that we focus on as part of the overall management of our business, including designing our compensation and benefits programs to be competitive and to align with our strategic and stockholders’ interests. Accordingly, we use a mix of competitive base salary, cash-based annual incentive compensation, equity compensation awards and other employee benefits. Some of our key employee benefits include eligibility for health insurance, vacation time, a retirement plan with an employer match, an employee assistance program and life and disability coverage. We also offer a variety of voluntary benefits that allow employees to select the options that meet their needs, which vary by country, and may include flexible spending accounts, hospital care, accident insurance, prepaid legal benefits, backup childcare, family forming benefits, homework support for students, student loan benefits, tuition reimbursement and a wellness program. These benefits are designed to offer employees a menu of options so that each employee can select benefits most meaningful to their personal situation. We consider our employee benefits to be an important component of total compensation for our employees.
Health, Safety and Environmental
Our operations and facilities are subject to various laws and regulations domestically and around the world governing the protection of the environment and health and safety, including the discharge and emissions of pollutants to air and water and the handling, management and disposal of hazardous substances. We are committed to employee health and safety in the workplace. In the U.S., our manufacturing facilities hold various certifications depending on the site. We also maintain health and safety programs conforming to best practices in the diagnostics industry. We are focused on minimizing risk and protecting our employees and communities by employing safe technologies and operating procedures, and in turn minimizing recordable incidents and improving safety across our organization.
We believe that all of our manufacturing and distribution facilities are operated in compliance with existing environmental requirements in all material respects, including the operating permits required thereunder. Although we do not currently expect the costs of compliance with existing environmental requirements to have a material impact on our financial position, we may incur additional costs or obligations to comply with environmental and health and safety requirements as a result of changes in law or customer demands, including those related to our products. In addition, many of our manufacturing sites have a long history of industrial operations, and remediation is or may be required at a number of these locations. Although we do not currently expect outstanding remediation obligations to have a material impact on our financial position, the ultimate cost of remediation is subject to a number of variables and is difficult to accurately predict.
Corporate Philanthropy
We listen to our internal and external stakeholders and aim to translate their needs into innovative solutions, in the products we offer and in our corporate philanthropy work. Our charitable giving programs operate under the QuidelOrtho Community Action Review and Endowment Squad (“QCARES”) committee, which is responsible for quarterly review and approval of charitable contributions proposed by employees. Our charitable giving programs and activities in the U.S. consist of the following:
•Matching gifts−We match charitable contributions by full-time, regular employees to qualifying non-profit organizations of up to $250 per employee annually.
•Volunteer incentive program−When an employee volunteers at an organization for a minimum of 20 hours in a calendar year, we donate $100 to that organization.
•General QCARES fund−We may donate up to $2,000 to an organization proposed by an employee.
•Community partnerships−As part of our commitment to expanding equitable access to healthcare, we have partnered with several major organizations to donate COVID-19 testing products to various communities across the nation to promote increased testing within communities to help prevent the spread of COVID-19.
ESG Strategy
As a world leader of in vitro diagnostics, we develop and manufacture innovative diagnostic technologies and solutions that transform data into answers and understanding into actions to enhance clinical outcomes for more people in more places every day. We bring fast, accurate and reliable diagnostics when and where they are needed most – from home to hospital, lab to clinic.
As part of our ESG strategy, we are focused on the following cornerstones:
•monitoring the impacts of waste generation and energy and water usage consumption;
•implementing efficiencies at our global facilities and in our product manufacturing that mitigate risks, reduce costs and address impacts;
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•supporting equitable access to healthcare in our communities;
•fostering a culture of happy people that welcomes and promotes diversity and inclusion;
•advancing good corporate governance that aids our long-term business success; and
•being accountable, fair and transparent.
We believe these cornerstones contribute to the value created by our Company for all of its stakeholders and to fulfilling their expectations.
Information Available on Our Website
This Annual Report and each of our other periodic and current reports, including any amendments thereto, are available, free of charge, on our website, www.quidelortho.com, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). From time to time, we may use our website as a channel of distribution of material information related to the Company. Financial and other material information regarding the Company is routinely posted on and accessible at https://ir.quidelortho.com/. The information contained on or connected to our website is not deemed to be incorporated by reference into this Annual Report or filed with or furnished to the SEC and should not be considered part of this Annual Report.
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Item 1A. Risk Factors
In addition to the other information contained in this Annual Report and the exhibits hereto, the following risk factors should be considered carefully in evaluating our business. The risks and uncertainties described below are not the only risks and uncertainties that we face. Additional risks and uncertainties not known to us or that we currently deem immaterial may also impair our business operations. The occurrence of any of the following risks may materially and adversely affect our business, financial condition, results of operations and future prospects.
Risk Factors Summary
The following is a summary of the principal risks that could adversely affect our business, results of operations and financial condition:
•risks related to the consummation of the Combinations, including (i) failure to integrate successfully the businesses of Quidel and Ortho in the expected timeframe, or at all; (ii) the synergies attributable to the Combinations may vary from expectations; (iii) continued incurrence of significant transaction and merger-related costs; (iv) disruption of our business relationships; and (v) business issues of Quidel or Ortho prior to the Combinations being imputed to the other;
•outbreaks of contagious diseases and other adverse public health developments, such as the COVID-19 global pandemic;
•the highly competitive nature of our industry and market segment;
•failure to research and successfully develop new technologies, products and services and develop new markets;
•adverse developments in global market, macroeconomic and geopolitical conditions;
•fluctuations or a decline in sales of our COVID-19 and influenza diagnostics tests;
•the loss of any key distributor or the failure to retain or expand our customer relationships;
•interruptions and delays in the supply of raw materials, components, equipment and other products and services provided to us, and manufacturing or warehousing problems or delays;
•the failure of our collaboration partners to fulfill their obligations to us;
•our inability to meet demand for our products and services;
•decreases in the number of surgical procedures performed, and the resulting decrease in blood demand;
•fluctuations in our cash flows as a result of our reagent rental model;
•our inability to achieve market acceptance of our products;
•significant changes in the healthcare industry and related industries that we serve, in an effort to reduce costs;
•consolidation of our customer base and the formation of group purchasing organizations;
•inability to realize the anticipated benefits of acquisitions and divestitures;
•the occurrence of natural disasters, public health crises, geopolitical crises and other catastrophic events that may adversely affect our results of operations;
•risks associated with our non-U.S. operations and international sales, including currency translation risks, the impact of possible new tariffs, trade embargoes or trade wars and compliance with applicable trade measures;
•our inability to protect our information systems from cyber-based attacks, security breaches or privacy violations and failure to protect our cloud-based solutions;
•our inability to develop, obtain and protect our proprietary technology rights or defend against intellectual property infringement suits against us by third parties;
•the loss of EUA by the FDA on our COVID-19 products;
•our inability to obtain or maintain required clearances or approvals for our products, including approval requirements of the foreign countries in which we sell our products;
•our ability to adequately manage our clinical studies;
•failure to comply with applicable regulations, which may result in significant costs or the suspension or withdrawal of previously obtained clearances or approvals;
•disruptions at government agencies that prevent new or modified products from being developed, cleared or approved or commercialized in a timely manner;
•inability to procure government contracts, including due to government-sponsored tendering requirements, lack of funding and compliance and possible sanctions risks associated with our contracts with government entities;
•liability claims and harm to our reputation resulting from claims that our products are defective;
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•failure to comply with laws and regulations, including healthcare regulations, laws and regulations associated with our use of hazardous materials, anti-corruption laws and regulations, and federal, state and foreign data protection laws and regulations;
•risks related to changes in U.S. and foreign income tax laws and regulations;
•changes in our tax rates or exposure to additional income tax liabilities or assessments;
•need to raise additional funds to finance our future capital or operating needs or other business purposes;
•risks related to our indebtedness, which as of January 1, 2023, includes indebtedness of $2,638.3 million, as well as remaining availability under our Revolving Credit Facility (as defined in this Annual Report) of $786.9 million (net of $13.1 million of outstanding letters of credit);
•our ability to generate cash flow to service our debt obligations;
•restrictions imposed under the agreements governing our indebtedness from time to time, which may limit our operating flexibility;
•difficulty attracting, motivating and retaining executives and other key employees;
•unexpected payments to any pension plans applicable to our employees;
•work stoppages, union negotiations, labor disputes and other matters associated with our labor force;
•the outcomes of legal proceedings instituted against us;
•risks that the insurance we maintain may not fully cover any or all potential exposures;
•certain provisions of our amended and restated certificate of incorporation (our “Charter”), Delaware law and our amended and restated bylaws (our “Bylaws”) that may make takeover attempts difficult, which could depress the price of our common stock, or limit our stockholders’ ability to obtain a favorable judicial forum for disputes;
•additional costs and new risks associated with ESG matters;
•the volatility of the market price of our common stock;
•risks associated with future sales of our common stock by us or our stockholders in the public market; and
•failure to develop or maintain an effective system of internal controls.
The following is a more complete discussion of the risks facing our business that we have determined are currently material.
Risks Relating to the Consummation of the Combinations
The failure to integrate successfully the businesses of Quidel and Ortho in the expected timeframe, or at all, would adversely affect our future business and financial performance.
The combination of two previously independent companies, Quidel and Ortho, is a complex, costly and time-consuming process. As a result of the Combinations, we will be required to devote significant management attention and resources to integrate the business practices and operations of Quidel and Ortho. The integration process may disrupt the business of either or both of Quidel and Ortho and, if implemented ineffectively, could preclude realization of the full benefits, or any benefits, we expect to result from the Combinations. Any failure to meet the challenges involved in successfully integrating the operations of Quidel and Ortho or otherwise to realize the anticipated benefits of the Combinations could also seriously harm our results of operations. In addition, the overall integration of Quidel and Ortho may result in material unanticipated problems, expenses, liabilities, competitive responses, loss of or harm to customer or other partner relationships and diversion of management’s attention, and may cause our stock price to decline. The difficulties of combining the operations of Quidel and Ortho include, among others:
•managing a significantly larger company and expanded business, which will pose substantial challenges for management, including challenges related to the management and monitoring of the current and expanded operations and associated increased costs and complexity;
•coordinating geographically separate organizations, including extensive international operations;
•the potential diversion of management’s focus and resources from other strategic opportunities and from operational matters;
•performance shortfalls as a result of the diversion of management’s attention;
•aligning and executing our strategy;
•the disruption of relationships with, or the loss of customers, potential customers and other business partners and potential business partners;
•maintaining employee morale and retaining and attracting key management and other employees;
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•the disruption of, or the loss of momentum in, Quidel’s and Ortho’s ongoing business or inconsistencies in standards, controls, systems, procedures and policies;
•integrating two unique business cultures;
•the possibility of faulty assumptions underlying expectations regarding the integration process and results;
•consolidating corporate and administrative infrastructures and addressing duplicative operations;
•coordinating sales, distribution and marketing efforts;
•integrating IT, communications and other systems;
•changes in applicable laws and regulations and addressing multiple laws and regulations across the globe;
•managing tax costs or inefficiencies associated with integrating the operations of Quidel and Ortho;
•unforeseen expenses associated with the Combinations; and
•taking actions that may be required in connection with obtaining regulatory approvals.
Many of these factors are outside of our control and any one of them could result in increased costs, decreased revenues and diversion of management’s time and energy, which could materially impact our business, financial condition and results of operations. In addition, even if the operations of Quidel and Ortho are integrated successfully, we may not realize the full benefits of the Combinations, including the synergies, cost savings or sales or growth opportunities that we expect. These benefits may not be achieved within the anticipated timeframe, or at all.
The synergies attributable to the Combinations may vary from expectations.
We may fail to realize the anticipated benefits and synergies expected from the Combinations, which could adversely affect our business, financial condition and operating results. The success of the Combinations will depend, in significant part, on our ability to successfully integrate the businesses of Quidel and Ortho and realize the anticipated strategic benefits and synergies from the Combinations. We believe that the combination of the businesses of Quidel and Ortho will complement each party’s strategy by providing a balanced and diversified product portfolio, operational efficiencies, supply chain optimization, complementary geographic footprints, product development synergies and cash flow and margin enhancement opportunities. However, achieving these goals requires, among other things, successful integration and realization of the targeted cost synergies expected from the Combinations. The successful integration and anticipated benefits of the Combinations and actual operating, technological, strategic and revenue opportunities may not be realized fully or at all, or may take longer to realize than expected. If we are unable to achieve these objectives and realize the anticipated benefits and synergies expected from the Combinations within the anticipated timeframe or at all, our business, financial condition and operating results may be adversely affected.
We will continue to incur significant transaction and merger-related costs in connection with the Combinations.
We have incurred and expect to continue to incur a number of non-recurring direct and indirect costs associated with the Combinations. These costs and expenses include fees paid to financial, legal and accounting advisors, severance, retention and other employment-related costs, including payments that may be made to certain of our executives, filing fees, travel expenses and other related charges. There are also processes, policies, procedures, operations, technologies and systems that must be integrated in connection with the Combinations and the integration of Quidel’s and Ortho’s businesses. While we have assumed that a certain level of expenses would be incurred in connection with the Combinations and continue to assess the magnitude of these costs, there are many factors beyond our control that could affect the total amount or the timing of the integration and implementation expenses.
In addition, there may be additional unanticipated significant costs and expenses in connection with the Combinations. Although we expect that the strategic benefits of the Combinations will offset the transaction expenses and implementation costs over time, this net benefit may not be achieved in the near term or at all.
Our business relationships may be subject to disruption due to uncertainty associated with the Combinations.
Companies with which we do business may experience uncertainty associated with the Combinations, including with respect to current or future business relationships. Our business relationships may be subject to disruption as customers, distributors, suppliers, vendors and others may attempt to negotiate changes in existing business relationships or consider terminating their business relationships with us. These disruptions could have an adverse effect on our business, financial condition, results of operations or prospects, including an adverse effect on our ability to realize the anticipated benefits of the Combinations.
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Business issues faced by Quidel or Ortho prior to the Combinations may be imputed to the operations of the other.
To the extent either Quidel or Ortho had, or was perceived by customers to have, operational challenges, such as product availability, product or service performance, quality, workforce or other issues, those challenges may raise concerns by existing customers of the other company, which may limit or impede our future ability to obtain additional business from those customers.
Risks Relating to Our Business, Strategy and Operations
The COVID-19 global pandemic has adversely affected, and may continue to adversely affect, our business operations, strategy, financial performance and results of operations, the extent of which is uncertain and difficult to predict.
Any significant outbreak of contagious diseases and other adverse public health developments in countries where we operate could have a material and adverse effect on our business, financial condition and results of operations. As a result of the COVID-19 pandemic and the related responses from government authorities, our business operations, strategy, financial performance and results of operations have been affected in a number of ways and may be further adversely impacted in a number of ways, including, but not limited to, the following:
•increased costs in our manufacturing, production and shipping processes;
•a slowdown or stoppage in the supply chain of our raw materials, components, including but not limited to the key components of our instruments and assays, equipment and packaging services used to manufacture our products or our inability to secure additional or alternate sources of supplies or services needed to manufacture our products;
•our inventory might be requisitioned, diverted or allocated by government order such as under emergency, disaster and civil defense declarations. For example, government actions in response to the COVID-19 pandemic affected and may in the future affect our supply allocation, and those and our own allocation decisions can impact our customer relationships;
•interruptions or delays in global shipping to transport and deliver our products to our distributors and customers;
•interruptions in normal operations of certain customers that could result in reductions in demand for routine, elective and other non-COVID-19 related healthcare procedures and testing;
•disruptions to our operations, sales, distribution, R&D and other important business activities and those of our business partners, including a shutdown of one or more of our facilities, warehouses or product lines;
•our ability to meet any increased demand for our COVID-19 testing products;
•limitations on employee resources and availability, including due to sickness or personal quarantine;
•disruptions encountered by health regulatory agencies globally in their operations. For example, the FDA and comparable foreign regulatory agencies may have slower response times or be under-resourced, and as a result, review and approval of product registrations may be materially delayed;
•an adverse impact on collections and timing of cash receipts from our customers, which could result in significant fluctuations in our cash flows from period to period; and
•an increase in the volatility of our stock price, fluctuations in foreign currency exchange rates or rising interest rates.
In response to increased demand of some of our products brought on by COVID-19, we rapidly and significantly expanded our manufacturing capacity, including expanding and scaling our infrastructure to support existing and anticipated COVID-19 testing demand and commercial activities. This rapid expansion has placed and may continue to place significant strain on our management, personnel, operations, systems and financial resources. Failure to successfully manage this expansion could negatively affect our operating results, including due to decreases in demand for our products, inefficiencies in implementing such expansion or higher costs for materials, technology, equipment and human capital. Moreover, we may not realize the revenue growth and profitability we anticipate for our COVID-19 and other diagnostic products, which could cause, among other results, a failure to realize the benefits of our manufacturing capacity expansion, excess capacity and the value of those investments being written down or written off. Similarly, we have experienced significant volatility in demand for our COVID-19 products since they launched, with periods of significant demand and periods where we experienced dramatic decreases in demand. Demand has fluctuated as a result of various factors, including the resurgences of COVID-19 and its variants, the supply of COVID-19 tests generally, the purchasing activity of government entities, and the dissemination and effectiveness of vaccinations. As the COVID-19 pandemic reaches an endemic stage, the extent to which it may continue to impact demand for our products depends on these and future developments, which are highly uncertain and difficult to predict.
The COVID-19 pandemic has also resulted in global supply chain challenges. For instance, we have experienced shortages and delays in receiving certain raw materials and other components for our products and have experienced logistics and distribution
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challenges, as well as challenges in labor availability and rising labor costs, all of which have affected our ability to fulfill customer orders, including instrument placements, on a timely basis. Supply chain, production, logistics and distribution challenges have impacted, and we expect will continue for some period of time to impact, our results of operations. Although we and our contract manufacturer partners, suppliers of raw materials and other third-party vendors are pursuing additional sources for certain of these components, we may be unable to identify additional suppliers. We have also encountered and may continue to encounter increases in idle facility costs and freight and distribution costs, which in some instances have affected the pricing of our products. Any prolonged and significant supply chain disruptions or inability to provide products in countries adversely impacted by the COVID-19 pandemic could impact our revenues, increase our costs and negatively affect our business relationships and reputation, as well as our operating results.
The effects of COVID-19 may exacerbate the impact of other risks described in this Annual Report. As the COVID-19 pandemic reaches an endemic state, the degree to which it continues to impact our business operations, strategy, financial condition and results of operations will depend on future developments that are uncertain and difficult to predict. Although COVID-19 infection rates and severity have decreased recently, the occurrence, spread, severity and duration of any new outbreaks or resurgences, including the emergence and spread of new variants of COVID-19, actions taken to contain the resurgences or variants, and economic repercussions of the virus remain uncertain. We continue to evaluate the nature and extent to which COVID-19 may impact our business and operations.
The industry and market segment in which we operate are highly competitive, and our failure to compete effectively could adversely affect our sales and results of operations.
Our diagnostic tests and services compete with similar products made by our competitors. We may not be able to supply customers with products and services that they deem superior or at competitive prices, and we may lose business to our competitors. There are a large number of multinational and regional competitors making investments in competing technologies and products, including several large pharmaceutical and diagnostics companies and diagnostic divisions of diversified healthcare companies and conglomerates. We also face competition from our distributors and retail customers as some have created, and others may decide to create, their own products to compete with ours. A number of our competitors have competitive advantages, such as substantially greater financial, managerial, technical, R&D, clinical, manufacturing, and regulatory resources, capabilities and experience, and larger, more established marketing, sales, distribution and service organizations and other resources than we have. Moreover, some competitors offer broader product lines and have greater name recognition than we have. Our operating results could be materially and adversely affected if:
•customers and potential customers believe our competitors’ products and services better address their needs and expectations through product performance, product offerings, cost, automation or work-flow efficiencies, and even if we can demonstrate that our products meet their needs and expectations, they may resist changing to our products;
•our competitors take market share from our products, or we may not win opportunities because our competitors have or are perceived to have more effective servicing or marketing or greater or more timely product availability;
•our competitors are able to obtain regulatory approvals for products or services or otherwise bring competing products to market earlier than us; or
•our competitors offer more competitive pricing or we fail to manufacture, in a cost-effective way, or at all, sufficient quantities of our products to meet customer demand.
Competitive and regulatory conditions in many markets in which we operate restrict our ability to fully recover through price increases, higher costs of acquired goods and services resulting from inflation, and other drivers of cost increases. Furthermore, the introduction of counterfeit products into the markets we serve may have the effect of eroding confidence in our products or in our industry as a whole. In addition, there has been a trend toward industry consolidation in our markets over the last few years. We may not be able to compete successfully in an increasingly consolidated industry. We expect this trend toward industry consolidation to continue as companies attempt to strengthen or hold their market positions in an evolving industry. If we are unable to compete successfully in this highly competitive industry, it could have a material effect on our business, financial condition and results of operations.
In order to remain competitive and profitable, we must expend considerable resources to research and successfully develop new technologies, products and services and develop new markets, and there is no assurance our research efforts and our efforts to develop new technologies, products and services or markets will be successful or such technologies, products and services or markets will be commercially viable or accepted.
Our ability to retain customers, attract new customers, grow our business and enhance our brand depends on our success in developing and delivering products and services that meet our customers’ needs and expectations. We devote a significant amount of financial and other resources to researching and developing new technologies, products, services and markets. The development, manufacture and sale of diagnostic products and services and new technologies require a significant investment of
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resources, such as employee time, offices and R&D and manufacturing facilities, and development of new partners and channels. Furthermore, developing and manufacturing new products and services require us to anticipate customers’ and patients’ needs and emerging technology trends accurately. We may experience R&D, manufacturing, regulatory, marketing and other difficulties that could delay or prevent our introduction of new or enhanced products and services. The R&D process in the healthcare industry generally takes a significant amount of time from design stage to product launch. This process is conducted in various stages, and each stage presents the risk that we will not achieve our goals. In addition, innovations may not be accepted quickly in the marketplace because of, among other things, entrenched patterns of clinical practice or uncertainty over third-party reimbursements. In the event of such failure, we may need to abandon a product or service in which we have invested substantial resources.
We cannot be certain that:
•any of our products or services under development will be successfully developed, or if developed, will be timely introduced to the market;
•any of our products or services under development will prove to be safe and effective in clinical trials;
•we will be able to obtain, in a timely manner or at all, necessary regulatory approvals;
•the products and services we develop can be manufactured or provided at acceptable cost and with appropriate quality; or
•these products and services, if and when approved, can be successfully marketed or will be adopted in the market.
These factors, as well as supply, manufacturing or distribution problems or other factors beyond our control, could delay the launch of new products or services. If we are unable to deliver reliable products in a timely manner, promptly respond to and address quality issues, provide expected levels of customer service, and comply with applicable regulations and rules, our ability to deliver products that meet our customers’ needs and expectations and our competitive position, branding and results of operations may be adversely and materially affected.
Global market, macroeconomic and geopolitical conditions may adversely affect our operations and performance.
The growth of our business and demand for our products and services are affected by changes in the health of the overall global economy and, in particular, of the healthcare industry. Demand for our products and services could change more dramatically than in previous years based on funding and reimbursement constraints and support levels from governments, universities, hospitals and the private industry, including laboratories. Our global business is adversely affected by decreases in the general level of economic activity, such as decreases in business and consumer spending, increases in unemployment rates, the inflationary environment, rising interest rates, the recessionary environment, and budgeting constraints of governmental entities. Disruptions in the U.S., Europe or in other economies, including due to geopolitical conflict, including the ongoing conflict in Ukraine and rising tensions between China and Taiwan, or weakening of emerging markets, including China, could adversely affect our sales, profitability and/or liquidity.
A future deterioration in financial markets or confidence in major economies or other macroeconomic developments could affect businesses such as ours in a number of ways. A tightening of credit in financial markets could adversely affect the ability of our customers and suppliers to obtain financing for significant purchases and operations, could result in a decrease in or cancellation of orders for our products and services and could impact the ability of our customers to make payments. Similarly, a tightening of credit may adversely affect our supplier base, increase the potential for one or more of our suppliers to experience financial distress or bankruptcy, and could also impact our operations more directly, including any outstanding or contemplated credit facility or other borrowings. Our financial position, results of operations and cash flows could be materially adversely affected by difficult conditions and volatility in the capital, credit and commodities markets.
Fluctuations or a decline in sales of our COVID-19 and influenza diagnostic tests can have a significant impact on our operating results and if sales or revenues of our COVID-19 or influenza tests fluctuate or decline for any reason, our operating results could be materially and adversely affected.
A significant percentage of our total revenues is generated from a limited number of our product families. In particular, revenues from the sales of our COVID-19 tests have represented a significant portion of our total revenues. Sales of our COVID-19 products accounted for approximately 44% of our total revenues for the year ended January 1, 2023, which includes the impact of Ortho’s operations from the date of the Combinations. Demand for our COVID-19 testing products has and may continue to fluctuate or decline as a result of a number of factors, including but not limited to the emergence and impact of new variants or resurgences, the effectiveness of global containment efforts, and the increased market supply of COVID-19 tests by our competitors. Sales of our influenza tests accounted for approximately 11% of our total revenues for the year ended January 1, 2023, which includes the impact of Ortho’s operations from the date of the Combinations. Demand for our influenza tests can fluctuate or decline based on the severity of the flu season. The gross margins derived from sales of our COVID-19 and influenza tests are generally significantly higher than the gross margins from many of our other core products. As a result,
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if sales or revenues of our COVID-19 or influenza tests fluctuate or decline for any reason, whether as a result of a waning of the COVID-19 pandemic, a mild flu season, market share loss or price pressure, obsolescence, regulatory matters, such as loss of EUAs from the FDA for our COVID-19 products, or any other reason, our operating results would be materially and adversely affected on a disproportionate basis.
A significant portion of our total revenues are from a relatively small number of customers, and if we fail to retain or expand our customer relationships or significant customers terminate or do not renew their contracts, our business, operating results and financial condition could be adversely affected.
A significant portion of our revenues are from sales of products and services to distributors. Although we have many distributor relationships in the U.S. and globally, the market is dominated by a small number of these distributors and as a result, we rely on certain key distributors for the sales of some of our products. The loss or termination of our relationship with any of these key distributors could significantly disrupt our business unless suitable alternatives are timely found or lost sales to a distributor are taken up by another distributor. Finding a suitable alternative to a lost or terminated distributor may pose challenges in our industry’s competitive environment, and another suitable distributor may not be found on satisfactory terms, if at all. For instance, some distributors already have exclusive arrangements with our competitors, and others do not have the same level of penetration into our target markets as our existing distributors. In addition, our efforts to distribute our products directly in some markets may be unsuccessful. The loss of any key distributor or an unsuccessful effort by us to directly distribute our products could lead to reduced sales.
In addition to distributors, we also have a number of other customers who are significant. If our relationships with such customers are terminated, or such customers do not renew their contracts with us, or substantially reduce or stop ordering from us, and if we do not add new large customers over time, our business could be harmed. Our ability to continue to generate revenue from our significant customers will depend on our ability to maintain strong relationships with these customers and introduce competitive new products and services at competitive prices. Moreover, customer consolidation could reduce the number of customers and may increase the risk of our dependence on a small number of customers. Government agencies are also important customers, and in fiscal year 2022, have represented significant revenues. Our ability to procure further government contracts will depend on a number of factors, including the general level of support for testing, including for COVID-19, other macroeconomic and geopolitical conditions, budgeting constraints of governmental entities, tendering requirements and funding, and there can be no assurance that we will procure additional contracts, or if procured, the timing, pricing or amount contracted.
If total revenues from some of our significant customers were to decrease or not continue in any material amount in the future, or if we are not successful in growing our current or new customer relationships or timely transitioning our business from a lost or terminated distributor to one or more new distributors, our business, operating results and financial condition could be materially and adversely affected.
Interruptions and delays in the supply of raw materials, components, equipment and other products and services could adversely affect our operations and financial results.
We depend on third-party manufacturers, suppliers and vendors for some of our materials, components, equipment, packaging and other products and services. Any change in our relationship with our contract manufacturers, suppliers of raw materials and other third-party vendors or changes to contractual terms of our agreements with any of them could adversely affect our financial condition and results of operations. Further, unexpected increases in demand for our products or supply shortfalls could require us to obtain additional supplies or services in order to manufacture products to meet the demand. Some supplies require significant ordering lead time and we may not be able to timely access sufficient supplies in the event of an unexpected increase in demand or supply shortfall, or the cost of such supplies may be significantly greater. Our reliance on a small number of contract manufacturers and a large number of single and sole source suppliers makes us vulnerable to possible capacity or other production constraints of such suppliers or in their supply chain, reduced control over product availability, delivery schedules and costs and reduced ability to monitor compliance with our product manufacturing specifications.
As a result of the COVID-19 pandemic and other macroeconomic and geopolitical conditions, including inflationary pressures, general economic slowdown or a recession, rising interest rates, foreign exchange rate volatility and changes in monetary policy, we have experienced shortages and delays in receiving certain raw materials and other components for our products and have experienced logistics and distribution challenges, as well as challenges in labor availability and rising labor costs, all of which have affected our ability to fulfill customer orders, including instrument placements, on a timely basis. Supply chain, production, logistics and distribution challenges, including shortages of raw materials and components, cost inflation, shipping delays, labor availability constraints and rising labor costs, have impacted, and we expect will continue for some period of time to impact, our results of operations. As a result, we are currently encountering, and may continue to encounter, increased customer backlogs of orders and inventory shipments out of our warehouse facilities. If these increased customer backlogs continue, they may adversely impact customer relationships and affect our financial performance.
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Our business is also subject to risks associated with U.S. and foreign legislation, regulations and trade agreements relating to the materials we import, including quotas, duties, tariffs or taxes, and other charges or restrictions on imports, which could adversely affect our operations and our ability to import materials used in our products at current or increased levels, if at all. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, or other restrictions on our imports will be imposed in the future or adversely modified, or what effect such actions would have on our costs of operations. Future quotas, duties or tariffs may have a material adverse effect on our business, financial condition, results of operations or cash flows. Future trade agreements could also provide our competitors with an advantage over us or increase our costs, either of which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
In addition, due to regulatory requirements relating to the qualification of suppliers, we may not be able to establish additional or replacement sources on a timely basis or without excessive cost. For example, stringent requirements of the FDA and other regulatory authorities regarding the manufacture of certain of our products may prevent us from quickly establishing additional or replacement sources for the raw materials, products, components or manufacturing services that we use, or from doing so without excessive cost. Further, our suppliers may be subject to regulation by the FDA and other regulatory authorities that could hinder their ability to produce necessary raw materials, products and components. The SEC also requires disclosure for public companies whose products contain conflict minerals, such as tin, tantalum, tungsten and gold, that originate from the Democratic Republic of Congo and/or adjoining countries. The implementation of these requirements has caused and will continue to cause increased costs to comply with these disclosure requirements and may inhibit our ability to source these materials.
If our current contract manufacturers, suppliers of raw materials and other third-party vendors are unable or unwilling to manufacture or supply our products or components or requirements for raw materials in required volumes and at required quality levels or renew existing terms under supply agreements, we may be required to replace such manufacturers, suppliers and vendors and may be unable to do so in a timely or cost-effective manner, or at all. Any shortfall in our supply of raw materials, equipment or components, or our inability to quickly and cost-effectively obtain alternative sources for this supply, could have a material adverse effect on our business, financial condition and operating results.
We may experience manufacturing or warehousing problems or delays due to, among other reasons, our volume, specialized processes, and macroeconomic and geopolitical conditions.
The global supply of some of our products depends on the uninterrupted efficient operation of our manufacturing facilities, and the continued performance of our contract manufacturers, suppliers of raw materials and other third-party vendors under our contractual arrangements. Many of our manufacturing processes are complex and involve sensitive scientific processes involving the use of unique and often proprietary antibodies and other raw materials that cannot be replicated or acquired through alternative sources without undue delay or expense. Other processes present difficult technical challenges to obtain the manufacturing yields necessary to operate profitably. In addition, our manufacturing processes may require complex and specialized equipment, which can be expensive to maintain, repair or replace with required lead times of up to a year.
The manufacturing of certain of our products is concentrated in one or more of our manufacturing plants or those of our suppliers, with no or limited alternate facilities. Weather, natural disasters, public health emergencies, fires, terrorism, political change or unrest, failure to follow specific internal protocols and procedures, equipment malfunction, environmental factors, damage to our equipment or one or more of our facilities, or any other event that negatively impacts our manufacturing process, facilities, systems or equipment, or the process, facilities, systems or equipment of our contract manufacturers or suppliers, could delay, reduce, suspend or terminate shipments of products or the release of new products or could result in the delivery of inferior products. In such circumstances, our revenue from the affected products would decline and we could incur losses until such time as we or our contract manufacturers are able to restore or rebuild our or their production processes or we are able to put in place alternative contract manufacturers or suppliers. Similarly, any disruption or other operational challenges to one of our primary warehouse facilities could result in decreased revenue or increased costs given the challenge in finding suitable alternative facilities.
Our collaboration arrangements may not operate according to our business strategy if our collaboration arrangement partners fail to fulfill their obligations.
As part of our business, we are party to collaboration arrangements with other companies, including the Joint Business with Grifols, and we may enter into additional collaboration arrangements in the future. The nature of a collaboration arrangement requires us to share control over significant decisions with unaffiliated third parties. For example, governance of the Joint Business is shared with Grifols through a supervisory board made up of equal representation by us and Grifols. The supervisory board is responsible for all significant decisions relating to the Joint Business that are not exclusively assigned to either us or Grifols under the contract that established the Joint Business. Since we may not exercise exclusive control over our current or
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future collaboration arrangements, we may not be able to require our collaboration arrangement partners to take actions that we believe are necessary to implement our business strategy. Disputes between us and our collaboration arrangement partners could also result in litigation, which can be expensive and time-consuming. Additionally, differences in views among collaboration arrangement partners may result in delayed decisions or failures to agree on major issues. If these differences cause our collaboration arrangements to deviate from our business strategy, our results of operations could be materially adversely affected.
Unexpected increases in, or inability to meet, demand for our products and services could require us to spend considerable resources to meet such demand or harm our reputation and customer relationships if we are unable to meet demand.
Our inability to meet customer demand for our products and services, including as a result of manufacturing or warehousing problems or supply shortages or shortfalls, could harm our customer relationships and impair our reputation within the industry. For instance, we are currently encountering, and may continue to encounter, increased customer backlogs of orders and inventory shipments out of our warehouse facilities, due to a number of factors. Further, if we experience unexpected increases in the demand for our products or services or supply shortages or shortfalls, we may be required to incur additional costs to meet these demands. These costs could involve purchasing or producing safety stock of components or products, purchasing new machinery or obtaining additional labor resources or even the cost of acquiring or constructing new manufacturing facilities. This would increase our capital and other costs, which could adversely affect our earnings and cash resources. If we are unable to develop or obtain necessary manufacturing and production capabilities in a timely manner, our total revenues could be adversely affected. Failure to increase production volumes in a cost-effective manner, lower than anticipated yields or production problems could result in shipment delays, as well as increased manufacturing costs, which could also have a material adverse effect on our business, reputation, operating results and financial condition.
A decrease in the number of surgical procedures performed, and the resulting decrease in blood demand, could negatively impact our financial results.
Our immunohematology and donor screening products are frequently used in connection with the testing of blood prior to transfusion, which is typically associated with surgical procedures. A decrease in the number of surgeries being performed in the markets in which we operate could result in decreased demand for blood for transfusions, which would in turn result in lower testing volumes and, therefore, decreased sales of our products. For example, we believe markets in developed countries have, at times, seen a decrease in the number of surgical procedures and lower demand for blood in recent years. A decrease in the number of surgical procedures performed could result from a variety of factors, such as fewer elective procedures and the improved efficacy and popularity of non-surgical treatments. In addition to lower surgical volumes, blood demand could also be negatively affected by more efficient blood utilization by hospitals. Blood is a large expense for hospital laboratories and pressure on hospital budgets due to macroeconomic factors and healthcare reform could force changes in the ways in which blood is used. Fewer surgeries and lower blood demand could negatively impact our revenue, profitability and cash flows.
Our reagent rental model reduces our cash flows during the initial part of the applicable contract, which causes our cash flows to fluctuate from quarter to quarter.
Leases, rather than sales, of instruments under our reagent rental model have the effect of reducing cash flows during the initial part of the applicable contract as we support those commercial transactions until we are able to recover our investment over the life of the contract. The use of cash in connection with this model causes our cash flows to fluctuate from quarter to quarter and may have a negative effect on our financial condition.
We may not achieve market acceptance of our products among physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies, wellness screening centers, other POC settings, blood banks and donor centers, individual, non-professional OTC customers, or other customers, and this would have a negative effect on future sales.
We maintain customer relationships with numerous physician offices, hospitals, clinical laboratories, reference laboratories, urgent care clinics, leading universities, retail clinics, pharmacies, wellness screening centers, other POC settings, blood banks and donor centers, individual, non-professional OTC customers and other customers. We believe that sales of our products depend significantly on our customers’ confidence in, and recommendations of, our products. In addition, in a number of cases, our success depends on technicians’ acceptance and confidence in the effectiveness and ease-of-use of our products, including our new products. If we do not capture sales at the levels anticipated in our budget, our total revenues will not be at the levels that we expect and the costs we incur or have incurred may be disproportionate to our sales levels.
In order to achieve acceptance by healthcare professionals, we seek to educate the healthcare community as to the distinctive characteristics, perceived benefits, clinical efficacy and cost-effectiveness of our products compared to alternative products, including the products offered by our competitors. Acceptance of our products also requires effective training of healthcare
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professionals in the proper use and application of our products. Failure to effectively educate and train our technician end-users, continue to develop relationships with leading healthcare professionals or achieve market acceptance from healthcare providers or other customers with respect to the use of our diagnostic products could result in less frequent acceptance or recommendations of our products, which may adversely affect our sales and profitability.
The healthcare industry and related industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce costs, which could adversely affect our business, financial condition and results of operations.
The healthcare industry and related industries that we serve have undergone, and are in the process of undergoing, significant changes in an effort to reduce costs. Many of our customers, and the end-customers to whom our customers provide products, rely on private or government funding of and reimbursement for healthcare products and services and research activities. In the U.S., healthcare providers such as hospitals and physicians who purchase diagnostic products generally rely on third-party payors, principally private health insurance plans and federal Medicare and Medicaid, to reimburse all or part of the cost of the procedure. For example, MACRA repealed the formula by which Medicare made annual payment adjustments to physicians and replaced the former formula with fixed annual updates and a new system of incentive payments that are based on various performance measures and physicians’ participation in alternative payment models such as accountable care organizations. In 2018, CMS implemented certain provisions of PAMA, which made substantial changes to the way in which clinical laboratory services are paid under Medicare. The revised reimbursement methodology under PAMA results in relatively lower reimbursement under Medicare for clinical diagnostic lab tests than has been historically available. These legislative changes in the U.S., healthcare austerity measures in Europe and other potential global healthcare reform changes and government austerity measures may reduce the amount of government funding or reimbursement available to customers or end-customers of our products and services and/or the volume of medical procedures using our products and services. Third-party reimbursement and coverage may not be available or adequate in either the U.S. or foreign markets, current reimbursement amounts may be decreased in the future and future legislation, legislative amendments, regulation or reimbursement policies of third-party payors may reduce the demand for our products or adversely impact our ability to sell our products on a profitable basis.
Governmental and private healthcare providers and payors around the world are increasingly utilizing managed care for the delivery of healthcare services, forming group purchasing organizations to improve their purchasing leverage and using competitive bid processes to procure healthcare products and services.
Health insurance premiums, co-payments and deductibles have also generally increased in recent years. These increases may cause individuals to forgo health insurance, as well as medical attention. This behavior may reduce the demand for certain of our diagnostics products and services.
The foregoing changes in the healthcare industry and related industries that we serve may cause participants in the healthcare industry to purchase fewer of our products and services, reduce the prices they are willing to pay for our products or services, reduce the amounts of reimbursement and funding available for our products or services from governmental agencies or third-party payors, reduce the volume of medical procedures that use our products and services and increase our compliance and other costs. Moreover, we believe the overall escalating cost of medical products and services has led to, and will continue to lead to, increased pressures on the healthcare industry, both foreign and domestic, to reduce the cost of products and services.
Any of the factors described above could adversely affect our business, financial condition and results of operations.
Consolidation of our customer base and the formation of group purchasing organizations could materially adversely affect our sales and results of operations.
Consolidation among healthcare providers and the formation of buying groups and, with respect to our international operations, government-sponsored tendering processes, have put pressure on pricing and sales of our products, and in some instances, required payment of fees to group purchasing organizations or required us to provide lower pricing in the tendering process. Our success in these areas depends partly on our ability to enter into contracts with integrated health networks and group purchasing organizations. If we are unable to enter into contracts with these group purchasing organizations and integrated health networks on terms acceptable to us or if we fail to have our pricing terms accepted in the tendering process, our sales and results of operations may be adversely affected. Even if we are able to enter into these contracts or have our pricing terms accepted in the tendering process, they may be on terms that negatively affect our current or future profitability. Furthermore, given the average industry contract length for our Ortho instruments is five to seven years, if we are unable to enter into a contract with a new customer or renew a given contract with an existing customer, it may be several years before we have an opportunity to acquire or reacquire, as applicable, such customer’s business, which may have a material adverse effect on our results of operations in the interim period.
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We may engage in acquisitions and divestitures, and may encounter difficulties integrating acquired businesses with, or disposing of divested businesses from, our current operations; therefore, we may not realize the anticipated benefits of these acquisitions and divestitures.