Ortho Clinical Diagnostics Holdings plc
Q1 2021 Earnings Call Transcript

Published: 8 May 2021

[Operator:]

Good day, and thank you for standing by. Welcome to the Ortho Clinical Diagnostics Quarter One 2021 Earnings Conference Call. I would now like to hand the conference over to our first speaker for today, Mr. John Sanders, Vice President of Finance, Treasurer, and Head of Investor Relations. Thank you. Please go ahead.

[John Sanders:]

Thank you, Ann. And good afternoon, everyone. With me today to discuss our financial results are the Chairman and CEO of Ortho Clinical Diagnostics, Chris Smith; and Joe Busky, Ortho's Chief Financial Officer; Mike Iskra, our EVP of Commercial Excellence and Strategy, will join us on the Q&A portion of the call. This conference call is being simultaneously webcast on the Investors section of our website, and a version of today's presentation can be downloaded there.

[Chris Smith:]

Thanks, John, and good afternoon, everyone, and welcome to Ortho's first quarter 2021 earnings call. I'm pleased to be sharing with all of you Ortho's first-quarter results, and we'll start on Slide 4. I always really like to start all our presentations, whether they're with investors or customers or our teammates with our mission statement. It really is why we do what we do because every test is a life. We embrace this credo as a critical role we play in the global healthcare systems every day. I also want to take a second just to thank our global teammates around the world for everything they do every single day to deliver on this promise. Shifting to our Q1 '21 highlights on Slide 5. Our financial momentum has continued from Q4 into Q1, and we're very proud of our results and the hard work by our teammates around the world to achieve these results.

[Joe Busky:]

Thanks, Chris. As Chris noted financially, we've had a really good start to 2021. We saw a meaningful recovery in our base business that surpassed our own expectations and fueled solid growth across all of our geographies and segments. Now let me provide a bit more detail on our operating results for the quarter and full year, starting with the breakdown of our revenues on Slide 11. Please note that all comparisons are versus the prior-year periods unless otherwise mentioned. First-quarter total revenue was $506.8 million, compared to $407.9 million in the first quarter of 2020, which represents a 24.2% increase or 21.8% growth on a constant-currency basis. Core revenue of $499.3 million, which excludes contract manufacturing and other licensing revenue grew 21.1% on a constant-currency basis, which exceeded our initial estimate for Q1 provided last quarter. The substantial revenue growth in the first quarter was primarily driven by higher volumes within Clinical Labs, including $29 million in COVID-related revenue and Transfusion Medicine, as well as continued recovery in the Americas and ASPAC regions. Excluding that $29 million of COVID-related revenue, reported core revenue growth would have been 14%. As a trusted partner of hospitals, hospital networks, blood banks and labs around the world, our base business bounced back fairly well from the pandemic induced low points we saw in the second quarter of 2020.

[Chris Smith:]

Thanks, Joe. Before opening the line for Q&A, I'd like to just spend a few minutes on our final Slide 16, which really talks about the investment thesis for Ortho. We continue to believe it's an amazing opportunity from an investment perspective with Ortho. If you think about it, we really are the only pure-play IVD company, and more and more this IVD market is becoming a highly attractive market and growing, and we'll talk about this as we go through Q&A. But while we definitely saw some uplift due to COVID, we really see significant growth in our base business, which is exciting. The second one is really around the differentiators that we offer our customers, and it really focuses on this lifetime customer value and this reoccurring revenue base, which today still is around 93% of all our revenue is reoccurring. And finally, it's about momentum. And as you can see from the results in Q1, we've continued excellent momentum coming out of Q4 into Q1. And while we had very strong growth in several places coming out of Q4, we're seeing across the globe really into Q1, nice growth in places like Western Europe and in several of the emerging markets as opposed to just the Americas. And that's obviously leading to continued profitable growth. So really excited about where the business is going. And on that, John, I'll turn it back over to you, and we'll move on to Q&A.

[John Sanders:]

Thank you, Chris. Operator, at this time, if you would give the instructions and open the line for our first question.

[Operator:]

We have our first question from the line of Derik from Bank of America.

[Derik De Bruin:]

Derik De Bruin. So congratulations on the quarter, really strong to see you come out of the gate so strong. One of the things that sort of struck me, and I appreciate the Slide 8 you had on the immunoassay market. Just was wondering on that one. It's like that is an opportunity there. How long until you sort of can see that shift? I guess, can you remind - where are you sort of like soft in the immunoassay markets? What is sort of like the revenue opportunity to be gained and the growth there? A little bit more color on when it's going to take to sort of do that shift.

[Chris Smith:]

Yes. Look, I think that shift continues to happen. I mean if you think about - if you look down in the right, you can see that we show what percent of our installed base is integrated analyzers, and we moved up to 25% in the quarter. And the total growth of our integrated analyzers for the quarter was 14%. And that really is the driver. And just to give you a kind of high level, Derik, like we had a great quarter really across the business. So look, our clinical chemistry grew still 12%. So that's kind of our slides in tips. But when you look at our IA business, it grew 60% and even 30% without COVID. So obviously, you're going to say, look, Chris, your business is going to grow because of COVID in the IA. But our IA, just to give you an example, if you carve out COVID, our IA grew 30% and our clinical chem win grew 12%. So you can start to see that acceleration of the growth. And you start to see that reflected also in some of the gross margins with the big lift in gross margin. So for us, and I think we've talked about this with you all, as we look at our teams out in the marketplace, we really focus on shifting stand-alone analyzers to integrate it and then pulling through that IA business.

[Derik De Bruin:]

Great. And just one follow-up question on that one. I mean, very - the organic revenue growth target and upgrade there is a lot better than certainly what we anticipated and what you shared with us on the - during the IPO process. But it does beg the question, sort of how do we see the 22 - you have the comps, they decrease really tough comps. And just sort of seeing is like, I know it's too early as sort of talk about this, but I mean, are you comfortable with a mid-single-digit outlook for the core business in '22, even off of these comps?

[Chris Smith:]

Yes. We believe. So look, again, just use Q1 as an example of '19. I mean, we really had - we came out of the gates in January, February of '19 - excuse me, in '20. We came out of the gate in the first two months of '20, with 8% growth in January and February. Because China is our second largest market, COVID hit early there. And obviously, we pulled back. But the business has historically been running at that 4% to 6% percent base business growth, and that's before we've added on more analyzers as far as moving share, as well as other tests like things like PCT, pushing vitamin D farther across. So we do feel very comfortable with that mid-single-digit growth outlook. And look, fortunately, we're running even well above that because I think we're winning more than we've ever won before. And as we start to share and talk about the business, I think that's the biggest difference. Look, we still have - have wonderful tests we're getting pull-through, but the reality is we are winning more against competition than we've ever done in the history of the company. And that's really helping to drive that growth.

[Operator:]

Our next question comes from the line of Tejas Savant from Morgan Stanley. Your line is now open.

[Tejas Savant:]

So two questions on the GEO front. To what extent - Chris, did the weather have an impact in February for you guys in the States? And was underlying strength even stronger than what the numbers suggest here? And then second, on the point you made around sort of India. And I'm not sure if you mentioned Brazil there as well. But given the resurgence there, can you help us think through the base business offset versus the COVID testing upside that you're benefiting from in those yields? And how much cumulatively those two markets represent for you?

[Chris Smith:]

Yes. So look, the weather, I think, like a lot of people hurt us for about a week in February. Our main distribution centers in Memphis, and it pretty much got shut down for about six days. As you can imagine, so it definitely impacted the Americas in Feb - on that time frame in February. I would say the team did a really good job of probably recovering all that in March. So by the time we closed out the quarter, I think you were pretty - I think it had worked its way through kind of the system, if that makes sense. Look, as far as India, look, we're really - are pleased with what's going in on in India. To give you an example, that business was up almost 30% for the quarter in - just in India alone. And remember, India is about 60% of our business in Asia Pac. So as India go, so does Asia Pac. Now look, we're obviously concerned not only for the well-being of our teammates and all the people in India with what's going on with the research, but we're also a little bit concerned with where that business is. I will say, look, April has started strong in India. But I think what we need to keep an eye on kind of May and June and see what happens. But we have seen very nice recovery, really at the end of Q4 and all through Q1. And again, Brazil, very, very good market for us. I think it was probably up more than 40% in Q1. And so Brazil, again, our big - Brazil and Mexico are two big markets where we need to win down in Latin America. Our team has done a fantastic job managing through the end of it - in the last year and this year. So those markets are doing, I would say, very well as far as recovering. We obviously need to keep an eye on COVID, but right now, they're in very nice recovery month. Do we lose you?

[Joe Busky:]

Operator?

[Operator:]

And our next question comes from the line of Vijay Kumar from Evercore. Your line is now open.

[Unidentified Analyst:]

Hey, can you hear me? This is Paul on for Vijay.

[John Sanders:]

Yes, we can hear you, Paul.

[Unidentified Analyst:]

Thanks for taking the question. I was just hoping you could walk us more through the assumptions that are baked into the guide? What's the back half look like? Any color on the guidance by segment or geography?

[Chris Smith:]

Yes, I'll let Joe take that one on the guidance.

[Joe Busky:]

Yes. We - Paul, we've got continued strong growth in - across all of the segments in the second half of the balance of the year. We've got - as I said on the last call, on the COVID front, we said we were going to do $40 million to $50 million of full-year COVID on our last call. So we did $29 million in Q1. So we're looking at about $20 million of COVID in Q2, somewhere in that range. And again, as I said on the last call, we - in the guidance, we don't expect to see much COVID at all in the second half. Although, again, we hope there's upside to that guidance. As far as moving down the P&L. I think I said this on the last quarter call as well in terms of gross profit margin, we expect to see stronger gross profit margin and stronger EBITDA margin in the first half versus the second half, and that's really driven by - you've got more favorable manufacturing variances rolling through in the first half than in the second half. And the COVID revenue in the first half comes through at a higher-margin than some of our other immunoassay revenue, and so that's going to drive some higher gross margins in the first half versus the second half, too, as well as those EBITDA margins will be stronger first half versus second half for those same reasons.

[Chris Smith:]

Yes. I think the other thing, Paul, is when we look at the business and we try to get to the guidance, what we look at obviously backing out things like COVID. But we also back out some things that we think are tests that kind of align a lot with COVID. So we really do dig into to get to where we think the forecast is going to be or the guidance. And I think what's really driving it is Americas, as I mentioned, but Americas is moving much faster in the base business. So just - and I think the second one is EMEA, and in particular, Western Europe continues to perform better, I think, a lot. So while we knew that China and the emerging markets would be doing well in the double digits, I'd say, that those two big development markets are moving quicker, and that's why it would really hope to leave our raise of the guidance.

[Unidentified Analyst:]

Great. Thank you. And I don't know if you already mentioned it, but assumptions on antigen and serology for the rest of the year?

[Chris Smith:]

Yes. So Joe mentioned that, we did close to $30 million in Q1, and we're projecting to do about $20 million in Q2. And we have nothing built into our forecast for the second half of the year. So I think COVID still - I think it's still an unknown. But the way we've built our forecast, it's all front-loaded, and it's about $50 million on the front half of the year. One other thing on the guidance, I do want to come back to is remember, 93% of our business is reoccurring. So when we start to place - we win an account, we place the analyzer. We started gaining revenue, that really reoccurs. So I think once we get into that flow, when we're building out our models, you really can look at the placement of analyzers and build that.

[Operator:]

Our next question comes from the line of Patrick from Citi. Your line is now open.

[Patrick Donnelly:]

Thanks for taking my question. Maybe if you go back to the geographical front. China has obviously been a big focus area for you guys going back to the IPO. Can you just talk through a little more detail, the trends you saw in the quarter, the outlook for the remainder of the year. I know last quarter, you guys talked through some disruption around destocking by distributors. Things seem to be improving? And then also just where you are on the localization strategy there. I know it was a big focus for you.

[Chris Smith:]

Yes. So look, I would say that China has, I think, come back and rebounded incredibly well. They grew about 11% in the quarter. I think just as important to us is that integrated analyzers grew 14%. So again, we want to see them growing at or above market on the integrated analyzers and saw that. So I feel really good. I would say that's one of the places where we see the forecast continuing to rise throughout the year. I mean, obviously, Q2 for every part of the world can be pretty low comparables. But we see China will continue to rise because we really see a nice bounce back. As far as the localization strategy, we feel really good about where we are on that. I mean, we've - as you know, we - our first step was in two partnerships, one on the development of some assays and one on the development of a low-cost - a lower volume analyzer that we'll not only use in China, but we'll use in emerging markets. And the reason we really like that product for China is that a lot of our presence is currently in those staff labs in large hospitals. So we think it helps us further push deeper into China in some of these second and third markets. So both of those are going incredibly well. So I would say that that's kind of where we are right now from a localization perspective. Look, when we look at M&A opportunities, I mean, obviously, China, we believe will be one of, if not the biggest market, one of the biggest markets in the next five years. But Pat eventually catch up to the Americas. So we have a keen eye to that part of the world as well.

[Patrick Donnelly:]

And then maybe just one on the margin side, certainly appreciate the first half being stronger in the second half based on the comps. Can you just talk through how you guys are balancing the revenue strength and letting that flow through to the bottom line versus reinvestment in some key areas on the R&D side? And then following that, just what are the big focus areas on the organic investment side for you guys?

[Chris Smith:]

Yes. Look, I think we talked about it in two ways, Joe may get specifically to the numbers, but I think - Patrick, this is a business if you go back to '17 - '16, '17 and even '18 was growing 0% to 1%. And now you've got a business growing consistently in the high single digits. I think the question came up earlier from Derik about that mid-single digit, which we feel good at. Right now, we're running really hot. And I think a lot of people think it's COVID. And one of the things we talk a lot about, we really aren't a COVID business. I mean, you're looking at $50 million this year of our business. What we're focused on is the base business. And it's running incredibly well. And we believe that we are in a very unique position because, number one, we're the world - we're the market leader in transfusion medicine. But the second thing in that big market, we're the No. 5 player from a market share. And we're - we feel that our commercial excellence sales strategy is allowing us to move market share, especially against one or two of our competitors. So there is investment going into the global commercial organization because we believe that we can get in our analyzers and then start to pull-through the menu. And that's why we're really excited when we see the high-growth of IA because that strategy is working. So we are investing at a faster rate. Joe always talks about we're going to take of that revenue, and we're going to do a 1.2 to two x down to the bottom line. So we're holding that. But right now, I'd say we're on the lower end of that. We're probably at around 1.3 to 1.4 because we believe that the opportunity for investors is better in '22, '23 and '24 by investing in those dollars now because even a short contract is five years, right? So you win a deal today, it's going to be paying dividends. So I'd say, one is the commercial. The second is that we've talked a little bit, I think, about this - about our next platform. And we you'll see the lift in R&D and that majority of that additional lift is in advanced research and in our next platform, which really allows us to take the technology from dry chemistry and move it into IA. And that's going to be, we think, a game changer, where no water source needed to run IA. And this footprint, that's about half the size that we're on today with higher throughput. And so we're trying to accelerate the development of that. As you can imagine, those are long development cycles, four to five years. But that would be the other place that we believe there's the opportunity. So I would say that those are two - the two big places we're investing right now. I think you had a follow-on. And I'm sorry.

[Unidentified Analyst:]

Yes. I think you covered everything. I really appreciate it.

[Operator:]

Our next question from the line of Tycho from JPMorgan. Your line is now open.

[Tycho Peterson:]

A question on transfusion. Just curious, the CTS, since you've gone live there, if that contributed anything in the quarter, how we think about that ramp? And then can you just talk a little bit about the Swift launch, how you think about uptake there?

[Chris Smith:]

Yes. So CTS did go live, pretty big celebration around here at the end of January. And so we were running that pretty much as we went into February and March. And look, it was - like I think we've always talked about 2% to 3% growth to the total revenue, and it did represent that, probably a little bit on the higher side of that because the initial is stocking and getting it going. But it definitely contributed to that. As far as Swift, excited about Swift rolling out. We haven't gone out and started to disclose orders, but I will say we are starting to take orders for that. I think it's been very well received. I think their tactic is - there's really two strategies on that. One is making sure that we maintain our current base of business that are really customers that maybe had an auto view or had a vision that they're at six, seven years on whatever that technology is and the ability to bring them over to the swift and extend the life kind of net lifetime customer value, but also really a market share play. I think you know why we're the market leader. I will say that Grifols, Bio-Rad in particular, out, especially in the emerging markets, trying to grow their business. So we think there's opportunities there as well. But we haven't - it's still really early days.

[Tycho Peterson:]

Okay. That's helpful. And then I was going to ask a follow-up on the dry slide chemistry you talked about a minute ago. I know you had initiated the feasibility work. Is that the right time frame to think about kind of four to five-year development cycle? Or are there things that we could see sooner than that?

[Chris Smith:]

Yes. No, look, I think we will - you could see donor screening earlier than that if it's depending on regulators and the time lines. But Clinical Labs, I think you're probably playing with the right time lines.

[Tycho Peterson:]

Okay. Last one for me. I know you don't give segment level guidance, but with the increase from 7% to 9% to 9% to 11% for the core business, can you just talk about whether that's more weighted to one segment versus the other?

[Chris Smith:]

More weighted toward what? I'm sorry.

[Joe Busky:]

Yes just…

[Tycho Peterson:]

Yes. I mean, and if we think about the increase…

[Joe Busky:]

Tycho, it's more - it's probably more heavily weighted toward Clinical Labs as you think about that increase in guidance. Yes.

[Operator:]

Our next question comes from the line of Luke from Barclays. Your line is now open.

[Luke Sergott:]

Thanks for taking my question. So kind of a follow-up here on Derik is an important point, I think. So when you guys place in an integrated instrument or an automated, can you give us a sense of the immunoassay clin/chem mix? And so it's just really about modeling when that kind of flips.

[Chris Smith:]

Yes. Look, maybe Mike's the best one to take that kind of the wholesale strategy and how the team takes it from a stand-alone to so high end, how we start to roll out with the percentage and how it flips over time.

[Mike Iskra:]

Yes. Thanks, Chris, and Luke. Luke, Chris shared the slide. When you look at the revenue split in the market, which is closer to 60-40 immunoassay, that pretty much holds true with the customer base as well. So when we have a chemistry customer and we add on a new assay, and you have your new total, about 60% of that will be on the immunoassay business, compared to about 40% of value in the clinical chemistry.

[Chris Smith:]

And over time, maybe just to help, how long does that take over time? Let's say, it was a stand-alone and we move it to and integrated how long historically does it take to build on that?

[Mike Iskra:]

Well, there's two things that happen. One, you tend to see that pretty quickly. Again, these - as you move to integrated, you're the mainframe analyzer, there's a lot of incentive for the customer to consolidate all of their testing onto these analyzers. But again, what we also know is when you go back and look at market growth, the immunoassay side is not only from a revenue point of view, larger, it's the faster-growing side of the business because that's where a lot more new menu is coming from as well. So ongoing, not just that initial bump there, but ongoing, that's a better growth driver for us, faster pace going forward as well.

[Luke Sergott:]

And then as you think about the M&A landscape, I love that slide you guys put up there. With two of the recent molecular companies off the table, does that change your timing and strategy?

[Chris Smith:]

Yes, those were - look, I would say we're going to be prudent, and we're going to be opportunistic. And I think I think one of those was very interesting. And the other, I think, went above where we felt the value was. So but we were definitely - I think we're looking at those type of businesses. So I wouldn't say it changes our timing. I think it depends a lot on the business. And why molecular is there, we think there's some interesting opportunities in IA. We think BOC, look at Transfusion Medicine. There's a couple of categories that we like in the transfusion medicine side of the business. And the other one is, I think, obviously, there are some interesting companies that are not U.S. or European-based as well. So look, I wouldn't say it's changing our timing. We're not running after it. I mean, I will tell you, there's 5,000 people that work here. There is definitely a group of people, a small group though, of people focusing on where we can identify those opportunities. But 98% of the people or whatever work here, their focus is day-to-day placing integrating analyzers, pulling through menu, becoming more efficient. So I think it's working. And when the right opportunity comes along, we believe we're positioned now to acquire it and then do whatever makes sense. I don't know if I answered your question.

[Luke Sergott:]

You did.

[Chris Smith:]

Okay. But I don't think we're change - it's not like we're out chasing because we feel like we need to do it. We think as you look at '23, '24, it'd be nice to have the right business to fold in because of our call point and our 2,200 people in the field.

[Operator:]

Our next question comes from the line of John from UBS. Your line is now open.

[John Sourbeer:]

Congrats on the quarter, and thanks for taking my question. I guess, just building a little bit on the upgrade cycles. I think automation is small, say, around 1%. Can you provide an update on just where - how automation was in the quarter? And how does that mix look across for the year? And then did you provide a total placement number for the quarter?

[Chris Smith:]

No. We're only talking about growth, not total - you mean total units?

[John Sourbeer:]

I think you gave the integrated placement but did you get the total units across all that?

[Chris Smith:]

Yes. We gave the integrated growth. So integrated grew about 14%. Yes. Look, on automation, look, I would say it was a good quarter as far as growth perspective. I'm just looking here, but pretty much double digits. Yes, you want to take that, Mike?

[Mike Iskra:]

Yes. So when we look at the quarter, good, automation has been, as you guys know, a focus for us, along with integrated. Our objective there is the drivers that support the need for automation are pretty prominent with our customer base. We're trying to make sure customers see the benefit of our flexibility, cost effectiveness, and we've been getting more and more traction, bringing that in. We are up as far as installed base, up over 20% on automation. So again, even faster growth there and in line with our strategy of how we want to grow our base. Overall installed base growth, driven by integrated and then even faster with automation. So that held true for Q1.

[John Sourbeer:]

And I think leverage is around 4.4 times in the quarter, a little ahead of schedule. Any updates on the delevering plans for the year and year-end targets? And then, I guess, just with the current level of leverage, is there any target level where you'd be more comfortable on executing deals? Or are you comfortable at the current levels?

[Joe Busky:]

Yes. We are - John, we are a little bit ahead of schedule and the leverage ratio at 4.4 at Q1. And I would say for the full year, by the end of the year, we should be at four, slightly below four without too much difficulty. We're definitely trending that way and all of our internal forecast to say that. I've talked before about getting to a target level of around three and a half times, and we're going to be darn close to that by the end of this year. So we've got a lot of capacity or will have a lot of capacity by the end of the year to do deals. And as I said, a much more balanced capital allocation strategy. I think we have a lot more ability to do investments, both inorganic and organic.

[Chris Smith:]

Yes. I think look, it obviously depends on the deal. Yes. Look, I think one of the challenges, I think you heard this earlier in the question about the two recent moleculars, I mean I would say the one thing I'm really proud of our team that's in business development, if you look at some of the innovative partnerships we've created along the way, like with IDEX and with Thermo and with Grifols. I would say that we - the deals we like are the ones where - before the bank book is outflowed in The Street. And I think that's really - some of those are going to be very different when you look at what they do to leverage.

[Operator:]

Our next question comes from the line of Matt from Goldman Sachs. Your line is now open.

[Matt Sykes:]

Thanks for taking my questions. Just two quick ones for me. One, just on pricing, I know - I think if my memory serves me, during the IPO, you guys talked about you generally expect sort of 100 to 150 basis points of price erosion over the course of the year. But I'm just wondering, I know it's only been a few quarters, but have you seen anything in the market to suggest that that's changed? Maybe inflationary pressures in the supply chain or anything?

[Chris Smith:]

Do you want to take that, Mike or Joe?

[Joe Busky:]

I'm not - no, I would say, Matt, we're not seeing any change in that. We're still tracking right along to that same estimate we talked about in the road show, no change.

[Matt Sykes:]

Okay. And then just going back to sort of M&A. On that slide, you guys talk about not just M&A but also partnerships. But as your balance sheet continues to strengthen over the course of this year and next year, does your thought process in terms of whether you do M&A or whether you do partnerships change?

[Chris Smith:]

Well, that's a really good question, Matt. And one that we have - look, I think the partnership has to be the right way. I can tell you, just to give you an example, when COVID was going on and a lot of people were chasing point-of-care or lateral flow. Our view is we don't want to build someone else's business. So I think it - if we create a partnership, it has to be long. I'll give you an example of the Ripples partnership's 50-year partnership that we've been in. So I think we're 30 years into it. I think it has to be a partnership where we believe that it makes sense long-term versus just something that's short-term because I think - and the reason being, we talked a lot about this inside our business. Our runway, we believe, is so great with where we are that we're in, that we really want to stay within that area. So I think it's got to be the right partnership at the right time and the things that we can do. And I think you've seen that that's kind of been our history, these long-term partnerships. But from an M&A perspective, obviously, you control the asset or the right distribution partnership, we think those are good ways for us to go.

[Operator:]

Our next question from the line of Steve from Wolfe Research. Your line is now open.

[Liza Garcia:]

You've got Liza on for Steve. I guess I just wanted to kind of understand a little bit more, if you could talk about the BARDA contract that you won and how to kind of think about that kind of flowing through? That's the first one. And then just understanding kind of where you're seeing kind of - I know that other - that it's a little bit different because it's an adjacent space, but some diagnostic players have obviously called out and there's different dynamics here, where the lease range and rental model mix has shifted. If you've seen any shift in that, if you could just speak to that as well? Thank you.

[Chris Smith:]

Okay. So look, Mike was really instrumental in that BARDA. Do you want to take the BARDA?

[Mike Iskra:]

Yes, sure. So the BARDA agreement, as you probably read through there is funding, that's through BARDA, the DOD partnered in that to fund the expansion of manufacturing capabilities in Rochester, New York. That's for both COVID related reagents and an instrumentation, which is our immunoassay product lines there. And from our point of view, we do some of that manufacturing on the reagent side, in Penford Wales and ex-U.S. with some of the instruments. And so this is an opportunity for us actually, as the need for increased manufacturing has existed, to bring that onshore into the U.S. and in partnership. John I don't know if you want to comment on how that's going to flow through?

[Joe Busky:]

Yes. I mean, I just wanted to give 10 seconds on the accounting, just so everyone's clear, because we are booking some BARDA revenue now for a previous grant we got on assay development. But this grant is a little bit different in that it's a capital grant to build a line. So it will come through essentially as an offset to CapEx on the balance sheet. So we'll get favorable depreciation expense going forward because you'll have less of an asset on the balance sheet. So it won't come as revenue like the grant we have now come through as an offset to an asset. And I the other question you had, I think you had a question on the reagent rental versus cash. We're not seeing a big difference year over year in our cash versus reagent rental mix. It's pretty flat year over year.

[John Sanders:]

Thank you, everyone. That concludes our Q&A for day. Chris, do you have any closing comments?

[Chris Smith:]

No. Just thanks, everybody. We really appreciate you taking the time. I know we'll be talking to some of you throughout the day. And yes, again, we appreciate it. It was a great quarter and thanks for the time to be able to share with you, and we look forward to talking to everybody soon.

[John Sanders:]

And operator, I think you have here final instructions on the availability of the recording. Thank you again for joining.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference call. Recording will be available after this call. Thank you for participating. You may now disconnect.