McIntyre Partnerships Q1 2026 Companions Letter

Expensive Companions,

Efficiency and Positioning Evaluate – Q1 2026

Via Q1 2026, McIntyre Partnerships’ outcomes have been roughly -19% gross and -20% web. This compares to our benchmark, the Russell 2000 Worth, which elevated 5%. The fund’s trailing five-year returns are ~12% gross and ~9% web every year, which compares to our benchmark’s return of ~6% every year. Since inception, the fund has returned ~14% gross and ~10% web every year, in comparison with our benchmark’s return of ~7% every year. Our funding in QDEL is a considerably concentrated place, which makes market comparisons much less helpful at current.

McIntyre Partnerships Returns ^⁽¹⁾

Within the winners column, CC, ICLR, and SEG contributed 100-500bps. Within the losers column, FTRE, SHC, SWIM, and STHO misplaced 100-500bps, and QDEL misplaced over 500bps.

To state the plain, the Q1 consequence was not a brilliant spot for the fund. The first driver of our decline was a pointy pullback within the shares of life science instruments and medical system shares, to which the fund has vital publicity, and stock-specific points at QDEL, a life science instruments firm, which I had beforehand known as Inventory A. QDEL is now the fund’s largest place, and now we have collected a full place.

To chop to the chase, I consider QDEL’s present value is a once-in-five-to-ten-year alternative. For the third time in ten years, I’ve determined to dimension a place at greater than 20% of the fund’s capital, although now we have bought put choices which restrict our whole loss to beneath 20%. Our two earlier considerably concentrated investments, CC in 2019 and GTX in 2021, additionally concerned massive drawdowns at initiation. They’re additionally our two largest outright winners and drove a 120% gross return from 2020 to 2022, whereas our benchmark elevated solely 14%.

I don’t make this choice calmly, and I lay out my considering under. If I’m appropriate, I consider now we have the uncommon alternative for considerably outsized good points with no sensible danger of everlasting capital loss. Whereas I’m extremely assured in my evaluation, if I’m fallacious, our funding will end in a big but survivable loss. That is exactly the kind of alternative I search for, and I’m targeted and clear-minded as to the potential dangers.

Whereas our present drawdown is uncomfortable, as an investor, I consider one should sometimes make selections that will look silly within the close to time period to place the fund to generate substantial returns in the long term. I don’t think about the present value of QDEL rational and haven’t any specific view on the place it can commerce within the close to time period. I care solely concerning the enterprise’s outcomes and the accuracy of my estimates. These will drive our funding’s success or failure, not the near-term value motion, which I’ve no manner of predicting.

Past QDEL, the fund had combined outcomes. To the upside, CC skilled a major rally, largely attributable to pleasure round its cooling merchandise being utilized in information facilities. SEG rallied modestly as its deal to promote 250 Water Road closed, which, together with the choice to shut the Tin Constructing, has considerably diminished money burn, restructured the steadiness sheet, and put SEG on a powerful footing for fulfillment. We additionally had a profitable commerce in ICLR round its accounting restatement. Whereas I like ICLR’s enterprise and assume its shares are attractively priced, I didn’t wish to improve our publicity to healthcare, which accounts for over 50% of the fund’s capital, so I exited the place after it partially rallied again. On the shedding facet, SHC and FTRE fell alongside different medical system and life science device corporations. SWIM retrenched with different housing-related equities because the Iran conflict precipitated oil costs to surge, which dims the outlook for additional fee cuts. Lastly, STHO fell modestly in the course of the quarter for no specific cause. STHO is the second largest place within the fund. They not too long ago obtained full reimbursement from a seller-financed JV and are actually in a web money place. STHO has now repurchased ~10% of the shares excellent during the last 12 months, and I anticipate capital returns will speed up now that the JV has been exited.

Portfolio Evaluate – Exposures and Focus

At month-end, our exposures are 123% lengthy, 27% quick, and 97% web. Adjusted for our choices hedges, the portfolio is roughly 92% web lengthy. Our 5 largest positions are QDEL, STHO, SHC, SWIM, and MDRX, and account for roughly 92% of belongings.

Portfolio Evaluate – New Positions

QuidelOrtho Company (QDEL)

Life Science and Diagnostic Instruments Sector

Earlier than I dive into QDEL, I wish to briefly spotlight the general transfer in life science and diagnostics instruments YTD:

The life science instruments area has broadly declined amid fears that AI fashions will dramatically change how medication are developed. I believe we’re a methods away from anybody being injected with a drug made fully from asking ChatGPT with no additional testing, and QDEL particularly has virtually nothing to do with drug improvement, however when blue chip shares in your sector like ABT, TMO, and DHR are all down 15-20%, it is laborious to battle that development.

My level right here is to not preach and make a sector wager, a lot as to level out that neither the January rally in QDEL nor the numerous decline since then is going on in a vacuum. I don’t assume AI will basically substitute something in QDEL’s mannequin any time quickly. If the comp group begins to get well, because the shares are starting to in Might, I believe it’s a favorable backdrop for our funding.

Thesis

QDEL is a healthcare diagnostics instruments firm targeted on routine blood testing, primarily at hospitals and central labs, and point-of-care (POC) respiratory testing. Its enterprise is a razor/razor blade mannequin, the place machines are offered or leased up entrance for minimal price (i.e., “the razor”), after which clients commit to buy consumables at excessive gross margins (the “razor blades”). ~95% of gross sales are consumables. Within the labs and immunochemistry companies, which account for over 75% of gross sales, clients signal 5-7-year contracts, and the corporate boasts a >95% contract renewal fee. Given the extremely recurring and non-cyclical nature of their companies, diagnostics corporations usually have >25% EBITDA margins, although particular points have held QDEL at ~22-24% not too long ago.

The fundamental pitch is that QDEL is a rising, secure enterprise the place one massive concern, the top of the COVID pandemic, has collided with a sequence of smaller, largely one-time issues to create a major mispricing. To place the chance in perspective, I believe QDEL can earn ~$4 in 2028 FCF/sh. with 2-3x web leverage. Comparable corporations similar to Siemens Healthineers (SMMNY), ABT, Roche (RHHBY), and DHR all commerce >20x P/E. QDEL is presently buying and selling $11. We are able to debate multiples, however QDEL shares symbolize vital worth if the enterprise can return to regular development. A 20x a number of would yield $80.

The numerous mispricing could be defined by the previous expression, “the place there’s smoke, there’s fireplace.” With numerous issues going fallacious unexpectedly, it’s pure for buyers to query whether or not one thing very massive is perhaps going fallacious. I’m sympathetic to this sentiment and perceive why many buyers have put QDEL within the “don’t contact” field. Nevertheless, the problems are primarily impacting QDEL’s respiratory and China divisions, which mixed have been ~25% of 2025 gross sales. Whereas the problems in these two areas are vital, the opposite “core” ~75% of the corporate is buzzing alongside fairly properly, rising ~6% in 2025. I consider these “core” companies ought to earn 2027 revenues of $2.2B and help a 25% or higher EBITDA margin, yielding ~$550MM in 2027 EBITDA and ~$250MM in totally taxed unlevered FCF (ulFCF). Whereas the corporate has a considerable debt load of $2.5B with ~$170-$200MM in curiosity, on solely the wholesome companies, I consider we’re paying ~6x EV/EBITDA and ~13x EV/ulFCF, a considerable low cost to comparable growth-rate life sciences and diagnostics corporations that commerce at >10x and >20x, respectively. Additional, whereas troubled, the respiratory and China companies are value “one thing.” Even a very conservative 1x EV/Gross sales a number of would yield ~$730MM, or the corporate’s total present market cap. Nevertheless, quite than one thing that finally ends up offered in a hearth sale, I consider administration has a powerful plan to show round respiratory gross sales, and the headwinds in China are manageable.

Relating to the draw back, the corporate is levered ~4.1x at current, which I think about excessive however manageable given the extremely recurring mannequin. QDEL not too long ago refinanced its debt, with no maturities earlier than 2030. QDEL generated ~$600MM in 2025 EBITDA and expects ~$615-$630MM in 2026, versus $170-$200MM in curiosity and $130-$150MM in capex, with upkeep capex nearer to $100MM. Its Time period Mortgage B at present trades at par. Whereas levered, I consider QDEL has ample capability to cowl its curiosity prices and is proactively pivoting its respiratory enterprise for future success.

Additional, beneath the floor, I consider QDEL has a number of strategic levers it could possibly pull. First, QDEL has a captive leasing enterprise that’s at present a major drag on FCF, which may very well be unwound to spice up near-term money circulate. In 2025, QDEL leased ~$170MM of devices to clients. If, as an alternative, these devices have been offered to clients at a 35% gross margin and a 3rd get together offered the financing, it will end in a ~$250MM swing in pre-tax money flows. Whereas we perceive administration’s argument that the captive leasing enterprise is a vital gross sales device, QDEL retains the choice to pursue third-party financing, and the $250MM potential swing in money flows supplies a considerable buffer versus their $170-$200MM in curiosity prices. Second, the corporate is also break up up or divisions offered to pay down debt, which supplies a substantial margin of security that isn’t seen at first look. As an illustration, its immunohematology enterprise was rumored to be on the market in 2023, with an estimated value of $1.5-$2.0B. Since 2023, the phase has grown by ~10%, and its development fee has accelerated. Assuming a 25% standalone EBITDA margin and a 12x a number of, according to comparable transactions, yields ~$1.7B. Lastly, the corporate has ~$1B of leased tools held on its steadiness sheet. On condition that QDEL’s clients are a diversified group of hospitals, labs, and docs’ workplaces, I consider this collateral is right for an asset-backed mortgage. Mixed, I consider QDEL has ample functionality to satisfy its obligations, and the corporate retains substantial flexibility to deal with maturities.

The 5 Huge Points

I consider there are 5 distinct points impacting QDEL that buyers should perceive to spend money on the corporate: the decline in COVID testing since 2023, the corporate’s ERP implementation failure, flu seasonality, the Chinese language authorities’s reimbursement charges, and the earnings drag from the launch of QDEL’s next-generation respiratory product. 5 scary-sounding, unhealthy issues are loads to deal with, however I consider every is comprehensible and manageable if one does the work. This complexity is exactly the supply of the chance, and I consider resolving these points over the subsequent two years will drive a major reweighting of QDEL shares.

I dig deeper within the following sections, however as an preliminary sniff check, I wish to level out how unrelated these 5 points are. Does anybody actually assume that physician visits within the USA for flu, which fell roughly 30% in Q1, are associated to Chinese language reimbursement charges for ldl cholesterol and HIV testing? Equally, does the price to decommission a plant have something to do with bill timing following an ERP implementation? I might argue not.

I examine this to a coin-flipping contest the place tails has come up 5 occasions in a row. The chances of that occurring are about 3%. It is uncommon, but it surely inevitably occurs typically. If, after 5 consecutive tails flips, an odds maker costs the percentages of heads at 10:1, and allows you to flip as a lot as you need, it is best to take that wager. That is precisely how I consider QDEL is priced now.

COVID Gross sales Decline and Restructuring

The biggest driver of QDEL’s volatility within the final 5 years is the substantial development and subsequent collapse of QDEL’s COVID testing enterprise. QDEL was the primary firm to enter the market with a fast antigen COVID check in 2020. Because of this, QDEL gross sales went from $534MM in 2019 to ~$1.7B in 2020 and 2021, with EBITDA growing from ~$158MM to ~$1B in 2020 and 2021, respectively. QDEL used the income from the COVID windfall, together with its shares, which elevated 5x in value, to buy OrthoClinical in 2022, which now makes up QDEL’s Labs and Immunohematology segments and drives ~75% of the corporate’s gross sales. Nevertheless, since 2022, QDEL’s COVID gross sales have collapsed, falling ~95% in three years. Additional, as a result of gross sales decline, QDEL has incurred vital restructuring expenses because it closes capability it constructed to serve the COVID finish market, which has weighed on FCF. Mixed with the exit of the donor screening enterprise, QDEL’s gross sales and income have regarded erratic, risky, and in decline for 3 years. Nevertheless, beneath the floor, QDEL’s non-COVID and DS companies have been persistently rising.

As a thought experiment, if I informed you in 2019 that, within the subsequent two years, our income and share value would surge ~5x, and we’d get to make use of our money generated and the inflated share value to buy a secure enterprise that was 3-4x bigger than we have been in 2019, I believe everybody would leap for pleasure. If I additional caveated my prediction and stated that we’d then see the enterprise return to regular over the subsequent three years, however we’d lose ~10% of the cash we made on the peak to shut the vegetation we constructed, I believe virtually everybody would nonetheless be excited. Nevertheless, three years of decline and money restructuring expenses are an eternity within the public markets, and QDEL’s shares have lagged in consequence.

Whereas QDEL has subsequently run into three distinct, smaller points since Q3 2025 which have additional dropped its share value, the core of my thesis is that the decline in COVID income represents the overwhelming majority of the issues since 2022, when QDEL shares traded over $100, and the core companies have been executing properly within the background. As COVID gross sales are now not materials, QDEL can return to development, and shares symbolize substantial worth.

ERP Implementation

Since fall 2025, QDEL has confronted three distinct points impacting its inventory value, the primary of which is ERP implementation points in Q3. After the merger with Ortho, QDEL considerably elevated the complexity of its operations, as legacy QDEL primarily focused POC settings through distributors, whereas legacy Ortho focused hospitals and central labs through a direct gross sales pressure. The corporate operates in over 100 international locations globally. The choice was made to centralize operations and implement a brand new ERP system. ERP implementations are notoriously difficult; Gartner estimates that just about 75% of them are available above price and not on time. QDEL’s ERP implementation started following the 2022 merger, with a lot of the heavy lifting in 2024 and H1 2025, and incurred ~$100MM in money prices that weighed on FCF.

Regardless of the corporate’s finest efforts, after the system went stay, QDEL initially had problem amassing its accounts receivable. A/R elevated considerably from $295MM and $282MM and in Q3 and This fall 2024 to $387MM and $417MM in Q3 and This fall 2025. This resulted in QDEL lacking its 2025 FCF steerage, with adjusted FCF at ~17% of EBITDA, under its 25% goal. Nevertheless, excluding the A/R miss, QDEL would have exceeded its FCF targets. In a vacuum, I don’t assume many buyers can be notably involved with bill timing from hospitals, however given the sentiment in QDEL’s shares, the miss solely added gas to the narrative that “one thing” is fallacious at QDEL. Additional, in Q1, QDEL efficiently recovered roughly half of the rise in A/R, and I count on them to completely get well A/R throughout the subsequent yr. Whereas I perceive the narrative round QDEL’s money era, I think about the A/R miss explainable and within the rear view.

Flu Season

The second non-COVID concern affecting QDEL was a considerable miss in Q1 2026 flu revenues. Previous to its success with COVID, QDEL’s largest enterprise was the Sofia platform, a broadly distributed POC device

primarily used to check for flu A and B. As I’m positive nobody will probably be shocked to learn, the flu is very seasonal and tough to foretell. Following a powerful flu season (unhealthy for humanity however good for flu testing volumes), the 2025/2026 flu season once more regarded robust, and QDEL reported flu revenues up 6% in This fall 2025. Nevertheless, the flu season unexpectedly fell sharply in Q1, with physician visits for flu signs down ~30% y/y, which drove a ~46% decline in QDEL’s Q1 flu revenues. I attribute the miss relative to physician visits largely to channel fill points and a slight share loss, which I tackle within the LEX part under.

Once more, just like the A/R miss, I wish to emphasize that I believe the big flu miss is attributable to the flu’s inherent volatility and is one-time in nature. Traditionally, a weak flu season is usually adopted by a powerful one. Additional, similar to the A/R miss, I believe most buyers perceive this and can be inclined to present QDEL a cross, have been it not for the narrative and repeated misses relative to prior expectations. It’s these stacked one-time points which have precipitated the dislocation. I count on that as these aberrations reverse and return to regular, QDEL’s shares can improve.

China Reimbursement Coverage

The ultimate of QDEL’s three one-time points is the Chinese language authorities’s change in reimbursement charges for its product. Whereas the coverage will not be but finalized, it’s already affecting QDEL’s China revenues, which fell by ~15% in Q1 as distributors pulled again in anticipation of the proposed pricing change. Of the three points, I think about the China information an actual unfavorable, and whereas I used to be conscious it may happen, it barely lowers my upside in comparison with once we started buying shares within the fall. It is very important observe that adjustments in Chinese language reimbursement insurance policies have been hitting most gamers within the diagnostic area, with DHR, Roche, ABT, and so on., all experiencing points. I additionally argue that it’s largely outdoors of administration’s management, although their execution of cost-outs following the decline is essential.

The change in China’s coverage can also be probably the most tough concern to mannequin, as we nonetheless have no idea how, when, or what the precise coverage will probably be. Nevertheless, given the repeated issues in China, I believe considerably lowering my estimates for China is logical, and I fully exclude the China phase from my ~$550MM in core 2027 EBITDA projection. In 2025, the China phase had $334MM in gross sales and $141MM in EBITDA, although QDEL runs a big ~$600MM company phase that seemingly consists of $30-$50MM in prices largely attributable to the China enterprise. Administration has stated the rule change ought to impression roughly half the enterprise, with a 30-40% haircut attainable. For conservatism, I mannequin it as a $70MM EBITDA hit, with the impression felt virtually fully within the subsequent 18 months. Whereas materials, I mannequin QDEL’s core EBITDA at $550MM in 2027 earlier than any contribution from China or respiratory gross sales, thus I think about the China points manageable, albeit disappointing.

LEX Launch and 2026 Earnings Drag

Lastly, one of the crucial underestimated elements of the story is the launch of LEX for 2 causes: the chance is substantial, however it’s at present a ~$50MM drag on income because the product doesn’t launch in earnest till 2027. LEX is a next-generation POC device for molecular diagnostics testing, initially focused at COVID and flu A/B. As talked about earlier, I consider QDEL’s flu enterprise is modestly shedding share, and a minimum of a part of that loss is to rival molecular diagnostics rivals, similar to Abbott’s ID NOW and DHR’s GeneXpert. For instance, QDEL estimates that 90% of its Sofia clients are at present additionally utilizing molecular diagnostic instruments. To place LEX’s device in perspective, it supplies a constructive end in beneath six minutes and a unfavorable end in beneath ten, in contrast with 15 to half-hour for older molecular instruments. Whereas real-world accuracy and velocity can differ from what’s marketed, I consider LEX has a powerful likelihood of turning QDEL’s respiratory enterprise again right into a development engine. QDEL sizes the molecular respiratory market at ~$3B, and even 5% market share can be a major increase to its $400MM in 2025 respiratory gross sales.

Additional, I consider the market is underestimating the cash-flow drag from the launch of LEX. Whereas administration has not offered a lot element, they beforehand estimated the canceled Savanna platform as a ~$50MM drag on margins, or 200bp, with half reallocated to LEX, and sure extra in 2026 given its anticipated ramp into 2027. This leads to QDEL’s anticipated margin ramp from 22% final yr to >25% in H2 2027 showing steeper than it truly is. I consider QDEL is already working at near a 25% margin, excluding the LEX launch. As LEX rolls out in H2 2026, it can include excessive incremental margins, and I consider QDEL will meet its 2027 margin targets.

Important Focus Philosophy

Lastly, I wish to remind buyers of our concentrated place philosophy. When the partnership made our first considerably concentrated funding in 2019, I wrote a listing of standards that I consider any concentrated place should meet. These are our guardrails for taking up such a major funding. I wish to remind companions of those guardrails and briefly clarify why I consider QDEL meets them.

For a considerably concentrated funding, I’m on the lookout for:

• • Deep Moat/Predictable Money Flows – Whereas the phrase “deep moat” is commonly thrown round, what I imply by a “deep moat” is a enterprise with robust aggressive positioning that makes long-term money circulate predictable. I need investments the place I’m extremely assured that it will be tough for my long-term estimates to be considerably incorrect. The overwhelming majority of companies don’t meet this criterion, or a minimum of I don’t consider I’m able to analyzing them with such certainty. Single product medtech/pharma, development investments with out near-term money flows, swing commodity producers, and so on. come to thoughts.
  • ○ QDEL Clarification: ~75% of gross sales are its core lab testing and immunohematology practices, that are razor/razorblade fashions with excessive switching prices, 5–7-year contract phrases, 95% of revenues from recurring consumables, and a >95% buyer renewal fee. QDEL can also be presently gaining market share.
• • Ample Liquidity in Any Surroundings – Plenty of issues can go fallacious on the planet, from macro crises to plant fires to poor enterprise selections, which might trigger a world of hassle for a enterprise that should entry the monetary markets. I’m solely keen to speculate substantial capital in companies the place liquidity is a non-issue.
  • ○ QDEL Clarification: Whereas ~4x levered, the corporate renegotiated its time period mortgage within the fall, the debt will not be due till 2030, they’re in compliance with all covenants, and QDEL retains substantial levers, similar to promoting a division or exiting its capital-intensive leasing enterprise, which may very well be used to scale back debt
• • Clear Differentiated View (For Liquid Securities) – In a liquid safety, there are more likely to be just a few points which the market perceives as massive dangers. I will need to have a powerful view on these and should be satisfied that the result of those points is knowable and considerably totally different than the market expects. This may not essentially apply to extremely illiquid securities, the place lack of investor data typically explains the chance.
  • ○ QDEL Clarification: I consider the market is incorrectly viewing QDEL as extremely unpredictable as a result of 5 concurrent points, quite than a extremely predictable franchise offering routine medical diagnostics at hospitals and labs

• • Affordable Development (Or Very Sluggish Decline) – When shopping for a deeply discounted safety (i.e. beneath 5x run-rate homeowners’ earnings), we don’t want fast development. Nevertheless, we’re very cautious relating to companies in secular decline and would keep away from them typically.
  • ○ QDEL Clarification: Excluding respiratory gross sales, QDEL has persistently grown revenues at a mid-single digit fee for the final 5 years
• • Substantial Upside – I’m solely all in favour of vital focus the place we stand to make a substantial amount of cash, or a modest sum of money in a short time. One thing like a higher than 50% IRR sounds proper.
  • ○ QDEL Clarification: I consider QDEL is value a minimum of 15x my 2028 estimate of $4, or $60 per share. Assuming a 2.5 yr holding interval yields a 97% IRR.
• • Affordable Timeframe to Work – As all the time, timing is an informed guess, and I’ll regularly be fallacious. Nevertheless, I need our massive bets to have an inexpensive timeframe – assume just a few quarters, not just a few years.
  • ○ QDEL Clarification: I consider QDEL inventory can considerably reweight this yr because it generates constructive FCF in H2 2026 and China finalizes rule-making
• • Catalysts – Associated to timeframe, I ought to have affordable near- and medium-term catalysts for our funding.
  • ○ QDEL Clarification: I consider our largest catalysts over the subsequent 12 months are China finalizing reimbursement charges, constructive FCF in H2 2026 and FY2027, and a aid rally in life science instruments as AI fears show unfounded
• • Technical or Panic Promoting – That is admittedly an arbitrary idea, however ideally, I wish to be shopping for from technical or panicked sellers who’re value detached.
  • ○ QDEL Clarification: Following the Q1 2026 pre-announcement, QDEL fell >30% in a day, and roughly 40% of shares excellent modified fingers within the following week
• • No Actual Potential for Everlasting Capital Loss – That is by far the only most essential criterion. My evaluation ought to embody not simply common dangers, like macro, but in addition tail dangers. Nevertheless, I should be targeted on believable tail dangers. As an illustration, a plant fireplace is a believable tail danger; three simultaneous plant fires at three separate vegetation on three totally different continents will not be. This may all the time be a subjective judgment, however I should be satisfied it’s true.
  • ○ QDEL Clarification: Finally, this can be a judgment name. The corporate supplies mission-critical lab tools to hospitals beneath lengthy contracts and is presently rising MSD, excluding respiratory. The Ortho division has been acquired at 11x and 14x EBITDA beforehand, but shares suggest a sub-5x valuation. The combination of predictability, vital money era when correctly analyzed, and debt flexibility offers me confidence that our odds of everlasting capital loss are successfully zero. Additional, we’re hedged to restrict losses even when this situation performs out.

As all the time, please be happy to contact me with any questions.

Sincerely,

Chris McIntyre

References

1. (1) The returns offered on web page 1 from January by means of August 2017 symbolize the efficiency outcomes of a private proprietary buying and selling account managed by the Founder with a technique much like the technique of the Fund. All web returns are calculated utilizing a 1.5% administration payment, 20% incentive payment, and 5% laborious hurdle. Returns are topic to future adjustment and revision.

Authentic Put up

Editor’s Observe: The abstract bullets for this text have been chosen by Looking for Alpha editors.