Eurofins Scientific SE (ERF) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome, and thank you for joining Eurofins' 2021 Q3 Trading Update. Please note that this call is being recorded. [Operator Instructions] During this call, Eurofins' management may make forward-looking statements, including, but not limited to, statements with respect to outlook and the related assumptions. Management will also discuss alternative performance measures such as organic growth and EBITDA, which are defined in the footnotes of our press releases. Actual results may differ materially from objectives discussed. Risks and uncertainties that may affect Eurofins' future results include, but are not limited to, those described in the Risk Factors section of the Eurofins' annual report. Please also read the disclaimer on Page 2 of this presentation, subject to which this call and Q&A session are made. I would now like to turn the conference over to Dr. Gilles Martin, Eurofins CEO. Please go ahead, Gilles.

Thank you, Guy. Hello, everybody, and thank you for joining our quarterly call. While I'm pleased to report an another very good quarter for Eurofins, where we once again exceeded our objectives that -- which was quite pleasing. We've had organic growth of more than 11%, 11.7% in Q3. Our core business, more importantly, has been growing organically by 9%. Even if we compare to the pre-pandemic period, and Q3 of 2019 was a bit off, in that we had the rebound. We had the cyber attack in June 2019, where a lot of our labs were stopped, couldn't produce, couldn't bear, couldn't report. So we probably have had a stronger Q3 2019 than would have been the case otherwise. In spite of that, compared to this pre-pandemic period, our revenues are up 10% in Q3 2021, which is very good. On COVID, we've done more COVID tested -- testing than we set as an objective in Q3. We did EUR 300 million -- more than EUR 300 million, which is quite significant. We -- the mix is varying every month, every quarter, depending on where the pandemic is happening. It can -- it was a bit more in Europe in the peak of the summer, moving -- it has really increased again in North America. It's very difficult to predict exactly where the COVID testing requirement will be. But they are, in any case, higher than we expected. If I move to Page 4, so the business is doing well, pretty much all over the -- all over. We still have some areas of our business affected by the pandemic. Australia has been more affected this time or the Pacific and some Asian countries are still affected. In Europe and North America, things are more -- coming much more back to normal. Our food service -- testing for food service is still affected in some areas. Our environmental testing business in America is recovering now and we're getting to better comparable compared to 2019. Our BioPharma testing business is very strong. There is a lot of demand in many areas, especially biologics and antibodies, oligos, et cetera. So the outsourcing in that sector is increasing. The visibility on the outsourcing is very good. We see strong demand for quite some time. It's just confirming what we communicated already. The whole topic of chemicals and pollutants that stay present in the environment and our bodies and nature generally is getting more attention from consumers, from regulators. We see significant increase in testing for some chemicals, for example, PFAS in food, but also in the environment. This is unfortunately a very large class of compounds with hundreds of different compounds, only very few are monitored today. And we see the increase of this type of testing being required. Unfortunately, when someone gets born in the western world, we are born already with a lot of those chemicals in our bodies and some have not so good impact. Another good development this quarter is our TruGraf, or our TGI acquisition, our Viracor business is growing quite fast. We are now out of COVID. So we can talk to hospitals again. We can visit nephrologists again. We've seen a sample volume growth of 46% quarter-on-quarter. And it's just very early days. So of course, we need a few more quarters to get to meaningful numbers. And we've had a very nice breakthrough. We have OmniGraf, which is a test that covers both acute and non-acute rejection with the highest sensitivity that -- of any test or any test combination available in the world. This is going to be very good for our conversations with nephrologists as we are expanding our sales forces. So we also won our lawsuits against CareDx, our subsidiary that was involved in that. But of course, those things continue and will continue for a while in front of call it confirms what we always fought from the beginning as to our freedom to operate our TRAC, which is our secondary test. So overall, very good development. I'll go to Page 5. On COVID, well, we'll take the option to continue to maintain capacity. Of course, it's very difficult to plan what will happen with COVID. The -- we all want to live our lives normally again. And this is pretty much what is happening now in North America and Europe, at least. Unfortunately, nobody can really say what the virus will do, what the protection afforded by the vaccines will do. And also, nobody can really tell what measures will be necessary this winter to protect the population. What we do is also a public service, and we've done very well with the COVID crisis. So we've made enough money with it. So we decided to -- as we did at the beginning, we built capacity very fast, to be able to be there, if we would have been needed and that proved useful. We're still doing the same. We're maintaining capacity in many markets. We're not sure that this capacity will be needed everywhere. We will see. And actually, we do hope it won't be needed much, which would mean that we can put this pandemic behind us. There is definitely no certainty that we can put the pandemic behind us. Unfortunately, we still see reports of the seasonal illnesses coming back, the flu and other respiratory diseases. So we find it better for our contribution to society and potentially also for our shareholders to keep some significant testing capability. We do a more varied testing. It's not only that we do more antigen testing. It's also that we have to spend more money in maintaining sampling stations. We've set up a large number of sampling stations that cost money. The work we do to support the travel and safer at work generally, the cruise lines and other sectors, cost us more manpower to just man those sampling station. So the profitability is a bit lower, but it's -- we believe it will be, at least, a good profitability level. So as long as it's not diluting our overall profitability, we are fine we're doing this contribution. Overall, we are getting more and more recognition as a large contributor to developing solutions to fight pandemics. The U.S. Department of Air Force awarded us $30 million grant to build an oligonucleotide production facility to duplicate or to expand our facility in North America, just to be ready in case of need for new pandemics and because oligonucleotides are the key components that are used in the probes that are necessary to carry out molecular testing. Eurofins is one of the few testing companies worldwide, if not the only one, which is fully vertically integrated in producing our own probes, which enabled us to provide the right variant identification test within weeks of the new variants becoming identified as variant of concern or variants of interest. It's the same if we have to do tests for other respiratory pathogens, we are very well prepared to do that. We have also expanded our factories to develop and produce the extraction reagents that are required to purify the RNA. So we have, as a result of this pandemic, definitely significantly expanded our capability to respond and to produce IVD products. And this has been recognized by the U.S. government awarding us significant support to continue to do so. Another area where we've made progress on Slide 6 is a disclosure on what we do on ESG. Eurofins has always been an ESG enabler and has always done a lot to contribute to protecting the environment and making sure our world is a safer and better place, but we have not done much in disclosing it, though we have engaged -- we have first started to disclose more in the last 2 annual reports, and we've engaged more with the various rating agencies. And as you see in the last quarters, we've had a significant rating improvement by several agencies that honor our efforts in the ESG area. We have big ambitions. We have a carbon neutrality objective. And we have -- on the diversity side, I think we're a pioneer in this area. We're making a lot of effort to improve the quality and diversity, gender equality, but also other aspects of equality throughout our organization. And this is starting to be recognized. On Page 7, on the outlook. First, on the acquisition front, while it looks like we will exceed our objectives for this year, we will see by how much. We have -- throughout the pandemic, we've stayed active in having dialogue with various founders and entrepreneurs who might be interested in joining our group. This has led to a number of acquisitions this year already. We might do a few more until the end of the year. So we'll be a bit above our objective on that level. We think we can continue to deploy capital on M&A, although the valuations have increased a lot if we are very active, and we find the right fit and entrepreneurs who are really motivated to join us. We can usually still find enough deals, smaller deals at acceptable multiples. You see 28 acquisitions for EUR 160 million revenues. Those are not big acquisitions. It's a lot of work. But overall, we think they provide a better return on the capital employed. And therefore, that's what we intend to continue to do. So we are comfortable with our objective of adding EUR 200 million each year from acquisition in 2022 and 2023. And we might get close to that also in 2021 against an objective of EUR 150 million. So overall, this is -- this part of our growth objectives is -- seems to be well on track and definitely achievable while remaining conservative and doing investments that provide the right returns for our shareholders. Since we're doing a bit more COVID testing than we had as an objective, we've raised our objective for the full year. We haven't updated the profitability objective basically because it would not be meaningful. We could have added EUR 35 million, but that's -- we're just talking round numbers, and we don't want to spend a huge amount of time doing forecast on the one hand. On the other hand, we want to leave room to have some capacity available while we are not 100% sure it will be used. And we always prefer to be conservative. This quarter, we have once again significantly exceeded our objectives, and that's how we want things to be. So it is quite possible that we do better also in Q4 than the objective that we set. But we think round numbers as they are right now are fine. We will revisit our 2022 and 2023 objectives when we publish our annual results for 2021. For now, we'll leave them as is. It is quite probable that we will continue to do some COVID testing in the next couple of years. If I look at what other large clinical diagnostic companies or clinical testing companies communicate, they seem to be very bullish on the fact that they will be doing COVID testing in '24 and '25. Frankly, I have no idea what the world will bring. So I prefer to always err on the side of caution when we set objectives for the future. I want our shareholders to be able to rely on the things that the management of Eurofins is setting as objectives. And of course, if COVID continues, we will continue to test, and we'll do more than that. But we prefer -- our communication and objectives should not be misinterpreted. We prefer to be conservative. And if things turn out to be better, well, that's always good news. On the conclusions, Page 8. So the outlook remains very strong for our core business. This has been confirmed in the last quarter. This month is also going strong. We think the fourth quarter will also look very good. We continue to see a lot of testing. You might wonder why we only set EUR 150 million as an objective for Q4. Again, it's because we are conservative. If we were to judge by the month of October or the 2021 first days of October, we would probably -- we should have set much higher levels of objectives, but it really doesn't matter. I don't think in the greater scheme of things for the investors who are interested in Eurofins in the long term, it matters so much, whether we do $100 million, $200 million or $300 million of COVID testing in the fourth quarter of this year. So we thought this was a reasonable objective that takes into account a possible drastic reduction in the back end of this quarter if COVID goes away. And it's up to you to guess if you think COVID will go away. Obviously, some governments would like to think so. We'll all see, and we will all be happy if COVID actually goes away in November and December in the markets where we are active in North America and Europe. In the meantime, we continue to build our network. So we continue to make good progress in modernizing and building our hub and spoke network. We will have more labs coming on stream in North America and Europe over the next couple of quarters. We're making progress on our IT solutions, on our IT systems to become a fully digital company or group of companies. This is the overarching objective. We operate in a very dynamic market. The demand for what we do is only increasing. The question is more how can we satisfy this demand in the most reliable way, in the most cost-effective way, in the fastest way. And for that, we are continuing our digitalization investments and investments in technology and we are, I believe, leading our markets in those areas. So the outlook for the group remains very good. And I think actually, the more we learn about the technologies that are appearing and the capabilities that basically our industry, the testing industry can provide its clients to make sure food is safe, to make sure we can enjoy different kinds of food when the consumption of animal protein will have to be probably reduced by taste or by choice or by necessity. For example, we have a big problem in productivity of agriculture. Many -- due to global warming and other factors, the productivity of farming is not continuing to increase as it used to. So the world will have to become smarter and find new ways. And we are in the middle of this supporting those new forms of food and feed along the whole chain. In BioPharma, I don't need to talk about it again anymore, but obviously, with all the new technologies that have been developed, there will be massive investment in developing medicines and vaccines and other products that take advantage of those new possibilities. And we have massively polluted our environment. We, to some extent, continue to do so. And if we want to live healthy lives, we're going to have to get that under control and continue and expand the monitoring that we've been doing. So overall, we are in excellent markets, and we are continuing to build the company to support our clients achieve their goals with the new testing tools that are becoming available. So that's it for my introduction. I think now we can introduction. I think now we can switch to Q&A. Operator, we can go to Q&A, please.

[Operator Instructions] We can now take the first question from Neil Tyler from Redburn.

Gilles, a few from me on the topic of the growth in the core business. Taking into account what you mentioned about the base effect in Q3, both last year and particularly in 2019, it still seems that sequentially, there were some activities that appeared -- or there were some aspects of slowdown on a 2-year growth trajectory. And so in light of that, I could ask the question really whether there are any activities that are being constrained by you having to divert resources towards COVID-related activities. Also in the release, you talked very positively about your comparative markets, but I suppose the question is, are there any areas of activity where you become more cautious or even less optimistic? And then finally, you mentioned that you're continuing to out build the lab footprint, the hub-and-spoke model. Are there areas of activity that are currently constrained more by physical capacity as opposed to personnel, which might have been the inference of the first question I asked?

I think one should not over-interpret the difference on quarter-to-quarter in compared to 2019, which was a year that was affected by a massive cyber attack that really disrupted our business, and we might still have some impact of that cyber attack in some areas with clients having slightly diversified their supply. But overall, we will see on the following quarters, I mean, we are comfortably above our 5% organic growth on a compounded basis, and we believe this will continue. I don't think we've become less optimistic about anything. It's one quarter, summer quarter in addition, which is always a bit more volatile. And hub and spoke, yes, we do have physical capacity constraints. We are -- I mean, especially in BioPharma, there are areas where we just simply don't have the space to develop the testing plans that we want to develop. We want -- we are expanding in our genomics business in a big way. You -- I mentioned this oligo production capacity. We're investing massively on all continents in our basically genomic products business. Those vaccines, mRNA or made with RNA. So we manufacture RNA. We manufacture RNA for research. We manufacture it for clinical trials. And soon, we're going to be talking about therapeutic mRNA. There are many things that we are planning to do. We'll do, but we don't really have the space to do it, and we are building those labs. We're investing to do so. There are also areas still, for example, in our environmental testing business in North America, where we merged our 2 businesses TestAmerica and ours, where we still have some order sites that were in the process of moving into consolidated bigger sites. We've done some of that, but that is something -- that is a program that will happen over a few years. And we have restarted significant start-up activities. We've opened quite a few labs in Asia. This is the -- our objective for the next 10 years is to significantly increase our footprint in Asia. So we are -- we cannot really start business until we have the buildings. If we do buy existing building or lease existing buildings, we still need to build out the inside of the labs and then we need to get them qualified, validated, audited. So there is sometime a significant lag to us being able to serve our clients, and there is quite a bit of demand.

We can now take the next question from Andy Grobler from Crédit Suisse.

A couple from me as well, if I may, Gilles. Just going back to the lab expansion. Could you give us a little bit more information about how much you are opening in terms of percentage growth on your current capacity? And I guess, particularly within Asia, you've talked for a long time about building out into the Asian market, has that been accelerated in recent months? And then secondly, on a different topic, looking at remuneration and ESG, you say you've put those targets into business units and senior leaders plans. What kind of proportion is ESG making up of those plans? I guess, it varies, but on average, it would be good to know.

Yes, that's a good question. We should do more to communicate with you because you give us your time by looking at all our publications and our numbers, and I do realize we could give a bit more color. I mean you take our objectives very seriously, although we are more in the business of giving direction around that objectives in terms of capacity, it's the same. Frankly, we don't know. We don't calculate that as a percent of our total footprint. And probably, we should because we run our group as a number of independent businesses. And if it makes sense for 1 business, we just approve it, but we should tally that up all this. Also, it's a bit difficult to time because some start-ups take 3 years until they can touch the first sample, the first paying samples from the day we decide to do it and others, we can be faster, depend on the level of accreditation, client audits, et cetera, et cetera, that is required, whether we use an existing building, whether we build a new building. So yes, in Asia, we have, over the last 9 months, into 2021, definitely accelerated the number authorizations to start labs. When they will come on stream is highly variable. It will depend on how fast they get audited, approved, et cetera, and built. But we are not tracking that on a very detailed level. We could put more resources in all this to communicate with you, and it probably would make sense. But so far, maybe we've been absorbed by other things of building the group and responding to the COVID emergency. So yes, that's maybe your last question. We do have some of our teams that have been focused on COVID, responding to COVID and they have been less focused on other things in the meantime, and that can have an impact, of course, temporarily, but we are going to -- we are starting our budget process now for this year, and everybody is firmly focused on the core business for next year. And also internally, we treat COVID as something that might come on top, and we have some dedicated teams working on it now, but our core teams are focused on their core business. On ESG, I think the contribution is about 20% of the nonfinancial objective or something like that, 20% to 30%. I think it's in the remuneration report on the short-term incentives, and the remuneration report was probably published to our annual report. It's a lot of data, hundreds of pages. I'm a bit shocked at the size of the disclosures we have to do, probably keeping up myself with reading it, but that's about what it is. So financial objectives make 70% to 80% and personal goals make the rest. And of the rest, it's maybe 20% to 30% on 4 ESG objectives. But it's not only because people will -- paid for it. At least it brings -- the intention is to bring attention on it, that it is being measured, that it is being discussed at least once a year when pay -- our bonuses are being decided.

We can now take the next question from Tom Burlton from Berenberg.

Thanks for the opening remarks. My first few questions are a little bit more sort of COVID-centric. I was just curious about the upgraded objective for the EUR 1.2 billion for COVID-related revenues for the full year, which given the EUR 1.5 billion you've done already would imply EUR 150 million for Q4. That just seems like quite a sharp drop off quarter-on-quarter versus what you've recorded in Q3. Is that just sort of conservatism on the trajectory of testing? Or is it more due to what you're seeing already in terms of volumes, in terms of pricing? Or is it because of some of the changes we've had in terms of sort of public policy? The second question also concerns the sort of the objective change. You mentioned, obviously, you've not changed the EBITDA guidance today. But I'm not sure if I misheard you, I think you said you could have added EUR 35 million. Just curious on whether I did indeed hear you correctly in kind of where that number kind of comes from because that would imply quite a low margin, low incremental margin on the sort of EUR 200 million revenue upgrade, at least compared to what you did in the first half on a percentage margin basis? And then finally, a slightly more general question on pricing, and what you're seeing in some of your end markets, a, particularly in the BioPharma business, but then also similarly in molecular diagnostics and in PCR testing, just thinking in terms of having added all this capacity, having added a lot of live testing machines and so forth, what your expectations are for sort of industry-wide pricing in molecular diagnostics in infectious disease testing if we have a lot of industry-wide capacity, not just yourselves, but any thoughts on that would be interesting as well, please?

We're not in the business of forecasting the future. And I think with COVID, it's -- we have to be all very humble. We've seen many times pandemic taking turns that nobody -- well, some people expected, but nobody could have any certainty about. And therefore, we prefer to stay conservative. The stated objectives of government is to reopen and decide that the COVID pandemic is over. If that is going to happen, then there will be no testing in December and no testing next year and -- which will all be fine. It appears very unlikely. But if I'm going to set an objective, I have to set an objective based on things that we know today. I think it's very unlikely that we do so little COVID testing in the fourth quarter at EUR 150 million. But based on what we know today, it's a possibility, and we're conservative. I think that's what we owe to our shareholders. I mean, analysts can make any guess they want. We -- I think our duty is to say things that we think are likely to happen and hopefully, to exceed our objectives. But yes, we could continue at the same level in Q4 as we did in Q3. It all depends on things that we don't know. Will there be a big flu wave this year in Europe and North America? How will the government respond to it? Will they just tell people, well, simply stay home and that's fine? Or are they going to do more? It's things that are really hard to predict. So that's for the COVID. We have large contracts. And if there is a need, then we will test more. And that's why we're keeping the capacity there because it could indeed be a scenario where massive testing is required throughout the winter, at least, and not only in Q4. That's just one of the many scenarios that we could be faced with. And if you look at the situation, even in the U.K., it's getting a little bit worrying and then the number of hospitalization and death is definitely increasing. But it could turn the other way. Hopefully, it will start decreasing again in 1 week or not. So that's -- and that's not even talking about potentially a new variant, be the Delta Plus or another one, showing much more lethality and ability to overcome the vaccine protection. But all of that is speculative. So we're not in the business of speculating. We think we -- there is a high likelihood we'll do EUR 150 million or more, and that's why we said that. And when I said this EBITDA, I just said upgrading with the same margin. If we had upgraded the objective -- the EBITDA objective with the same margin and the EBITDA margin that we were targeting on the previous revenues, that would have amounted to a difference of EUR 35 million. It doesn't even make the EUR 50 million bar to go to EUR 1.75 billion. So it was really not the type of detail we wanted to go into. It's going to be what it's going to be. On the margin of COVID, yes, I think eventually, it will probably converge towards the margin of the rest of our clinical business, which varies between the countries and the businesses. If you look LabCorp, Quest, SYNLAB, they're all publishing. Of course, SYNLAB is publishing data only since COVID. Sonic has been publishing for many years. You will see that the margin of the clinical businesses are anywhere between 15% and 25% EBITDA. And I think COVID will converge towards that on the long run. And you know that's not so far than on overall Eurofins margin objectives. It has been higher in past quarters. Whether it will stay higher is a question, and it depends on many factors like utilization and things like that and pricing and reimbursement. As to pricing, it's not so much in market that determines pricing. Unfortunately, pricing is determined by payers, by reimbursement rates that are set by various governments. And they can be too high, like they are in the U.S. at the moment, or at some point, they can become low, which would be good for us because if it comes to being efficient, we are probably the most efficient player in that industry. So we'd be happy if the market was a true open market with the most efficient wins, we would sell much more at lower prices. But since we are highly automated and highly vertically integrated, it would be a fantastic market for us, and we'll make sure we make at least our group margins. But right now, health care markets are highly local, highly protected, prices are set by governments and they evolve over time by -- depending on what each country decides. And molecular pricing, again, the reimbursement for molecular is all over the place. In North America, each insurer is deciding, Medicare is deciding. They have -- for the routine business, they have a program called PAMA, which -- by which Medicare is measuring the average prices across the industry and making sure Medicare doesn't pay more in the industry, and they've been reducing their reimbursement for routine test for years based on that program. And I think that will follow the same process. So what will happen also is many more tests will become available. And it wasn't the norm to test for as soon as somebody got sick to test to find -- with molecular testing to test systematically to find out why people got sick and whether there was a resistance to an antibiotic towards treatment and then see what happens. Only the last resort would be testing. Now of course, with all this capacity of molecular testing, probably, but that's not sure, the indications and the reimbursement will be widened to identify which pathogen is causing the symptoms. And that could open a massive new market. And of course, the pricing will be down for each test. But the way we do it with multiplexing, running 1 test or 10 tests or 5 tests is not necessarily so much more costly. But we could talk about it for a long time because each country will have to decide what they decide to reimburse, what they feel appropriate should be reimbursed.

We can now take the next question from Dominic Edridge from Deutsche Bank.

Just 2 for me. Firstly, maybe leading on from the comments you were just making. I mean it does appear that a lot of speculators have entered the sector on with PCR testing, maybe some with less quality control and less good quality than yourselves. How do you see the market going forward? Do you see a certain amount of boom and bust going on there? Do you see that as an opportunity or a threat in terms of the added capacity that's currently in the system at the moment? And second question is just about people constraints. I think at the moment, you have about 10% of your current workforce you're advertising vacancies for. Is that a function of the amount of growth that you're aiming for? Or have you seen a bit more attrition and turnover in people? Or is there a competition for people at the moment in your industry?

Yes, I mean, you're probably referring to some news in the U.K. about a company that had been basically doing a very reliable job in testing. That happened in some markets that new players, new entrants came in and offered PCR test. And during the pandemic, there might not have been the level of oversight that labs undergo normally. And I think this will indeed clean out. Those role players will not withstand the proper supervision by authorities, and they will simply go away. That's fortunate. And they did unfortunately capture a significant part of the market and that established labs like Eurofins didn't get because, of course, if you don't do the test properly, you can be very fast. And if you don't test at all, you can be extremely fast. I'm not saying any of them did that, but it's sometimes some were really indeed cutting corners. But that's not everywhere. There are countries that remain very regulated, thinking Germany or France, where there are not so many new players. The thing that is happening, though, is that, for example, a lot of players are allowed to do antigen testing, rapid antigen testing. And frankly, those tests are not very reliable. They miss on asymptomatic patients, half of the positives but that's what the authorities seem happy to use for the time being. Of course, they are not going for 0 infection like China or Australia. Obviously, countries that want to have very low levels of infections are not doing that. They're using PCR testing. But most of America and Europe has accepted antigen testing as efficient. Of course, we have decided that we're going to live with COVID, and we are relying on vaccines to solve the problems. Of course, some places are not doing that. And there are still some countries in Europe where -- which rely heavily, if not almost exclusively, on PCR testing. But that's part of the problem of the virus going a bit -- I mean not being controlled because if you just test with antigen, you're not going to avoid the transmission. It's going to continue to spread. And on people, yes, I think it's a global problem that there is a shortage of labor in many, many industries, and our industry is not an exception. We -- and we are growing fast, as you mentioned, so -- which we've had for a long time, thousands of open positions on our different labs, and we have to live with that. And in some markets, yes, turnover, I mean, it's general. It's not necessarily our company, but turnover has probably increased. I think during the pandemic, people stayed where they were. And now we probably are going to see across all industries about -- the amount of turnover that we would have seen over 2 years or concentrated on 1 year, but that's a speculation. We're going to have to see the same thing for inflation. We're going to have to see. Our government seem to think that inflation is going to be transient. We're going to see if that is really the case or whether the inflation is here to stay. We definitely are raising our prices more this year, and we'll be raising prices more next year than we've ever done.

We can now take the next question from Rajesh Kumar from HSBC.

Rajesh Kumar from HSBC. On the Eurofins ADME-Tox launch, which you mentioned in your release, basically, you're clearly going ahead with a lot of small molecule early phase discovery capabilities with ADME products. And then on top of that, hold-through capabilities in villiform protein assay. So is this based on your understanding of where drug discovery demand is coming in Europe? Is it more mRNA or if it's still going to be a lot more small molecule discovery? Basically, the investments suggests that you think it's going to be more small molecule discovery. Or is it just an opportunistic -- you can see your pipeline and you're going after that with that capacity. I would love to understand that. So the second one is on the U.S. Air Force. Clearly, you've shown some capability which the market seems to -- which your customers seem to appreciate and you're winning contracts. Could you give us a flavor of what sort of other discussions you might be having that can potentially translate into future revenue opportunities? And finally, the duration of contracts you've had with the U.S. Department of Air Force and Department of Health Services?

Yes. Well, ADME-Tox is just anecdotal. I think our IR teams ask around in the company what has been done, what is new. I think we're, in fact, much investing more in large molecules than in small molecules. But we are doing both, and we still see very strong demand for small molecules and as well as, of course, for mRNA, for antibodies, for a lot of other therapeutic areas. So we are investing across the board. And actually, Discovery is one area that I failed to answer on a previous question, where we are limited by footprint. We need to expand our labs faster than we have been able to cope with demand. So it's labor, but it's also footprint. On the U.S. Air Force, yes. Well, we have a number of discussions around the world. We've been serving, for example, the Europe on sequencing. We've provided massive sequencing capacity to the European Union to fight pandemic, and we have this HHS contract. The durations are normally limited to the pandemic, which would be whatever, depending on the contract, 6 to 18 months. And then after that, I guess, there will be another round on surveillance, post-pandemic, but we're still in the pandemic mode and acute response to the pandemic. And I think after that, the question will be what do we do to avoid the next pandemic and those are discussions that we will have at that point.

[Operator Instructions] We can now take the next question from Nicolas Tabor from Stifel.

The first one would be on the cost -- the level of cost inflation you are actually seeing right now, and how much price increase you're actually passing on? And do you have specific contractual indexation? Or is it the case by case? Are there a period to pass on those price increases that we should be mindful of? Then secondly, on the core organic growth. So I understood that you had a high comp base in Q3 '19. So basically, we should expect Q4 more or less, unless anything exceptional, should be more in the range of the 13% to your stack adjusted organic growth for the -- for Q4 coming back to the normal trends? Is it the right way to look at it? And then on the COVID-19 testing mix, I was just trying to understand within the antigen test, so you said that the exposure to the point of sampling, the sampling stations, was diluting your margin. But how much is basically test that you perform and test yourself with the lateral flow test? And how much is just basically you manufacturing test that you then sell and therefore, you don't need sampling stations and so on? And how do you see that mix evolving now in October after 1.5 months basically of the, let's say, volume declines of COVID testing?

Well, we don't have consolidated indication of costs. We had a good success in controlling cost. We are a large purchaser of a lot of the things that providers to laboratories are selling. So we have good conditions, and we so far have good success in mitigating or eliminating push on cost increase. And we are also vertically integrated. So we can shorten the supply chain, remove intermediaries to reduce our cost, actually make even cost decreases in some areas. On labor, we're going to see -- it's usually once a year that we have salary adjustments. And that's usually in April. We're going to see the situation at that time in our various markets. On price increases, the ranges, I mean, normally, in a normal year, it would be 1% to 3%, what we do in January of each year. And we have indexation in some contracts when they are multiyear. We have -- also sometime, we raise prices on noncontractualized works anytime. In BioPharma, it's project based. So every time we quote for a project, we just quote what it is. And sometime we raise by much more than that. We've been raising certain things by 10% or 15%. And in January of next year, probably our average raise will be above the normal range. It's going to be probably above the 1% to 3% range that we usually practice. And I've heard more in maybe 3% to 6%. And -- but we're going to see. We are highly local, and we adapt to local situations and it's our local leaders who decide what is right for their markets. But yes, it's going to be a higher price increase, I think, this year than last year. And then we also -- it depends, it's a long negotiation because sometimes we negotiate with our large clients, they give us more business, they get less price increase and we win share. So it's all -- it's very difficult to track in the end what has been the net-net. And core organic growth, we don't do those things. We don't play this game of saying this is going to be this or that this quarter. Our objective -- our secular objective is to grow, at least ,5% organically and to continue to do that for a very long time. And I think on a year-by-year basis, we've exceeded that each of the last, I think, 9 or 10 years, and I don't see why it would be any different, but we will see. I think we should not overemphasize 1 quarter or another. Sampling stations, yes, we -- indeed, if we do antigen testing or actually if we sample for PCR testing, we have to have the teams that do that, and that cost much more money than just receiving the samples from clients and testing it. So -- and we do manufacture test. We manufacture -- we have our own antigen test that we sell, but this is still a very small fraction of our overall sales. The product sales are very small. We are not a big IVD supplier. So the -- our own production, except for some specialties, goes mostly to our own labs. We don't sell a huge amount of that to others. We do some, but not -- considering how much testing we actually do ourselves, it's a small amount. And so it's not going to change so much.

And then maybe just coming back on your previous comments. So basically, the 5% for next year, the run rate seems well engaged in your view from now where you see strong demand in your markets. And at the same time, you have some price increases that you're ready to pass on. So you should be quite comfortable. Is it the right way to think about it for '22?

Yes, of course. Of course, we are. But that's we always said. We think our 5% objective is a secular one, one that we don't change every year and especially not every quarter, and one that we think we'll apply for the long term. And if anything, we think it might be actually the actual numbers might fall above that. So we have not changed our perspective on that. That applies to our core business. COVID is going to be what it's going to be. And I'm the first want to hope that COVID goes away.

We can now take the next question from Patrick Wood from Bank of America.

Perfect. Just 1 extra quick one for me, please. I'm curious on OmniGraf? Obviously, the clinical data that was generally very strong as a panel and the reimbursement structure for TruGraf was, I would say, generous. Any color you can give us on the outlook for that? I mean, is there a reimbursement code set up yet? How are you looking at converting things? I think it's like 40,000 transplants in the U.S. annually on the renal side. But I guess it depends how many times you're testing people with the panel to test for rejection for how big that market could be. But any kind of color on initial perception from the market or pricing or anything like that would be really helpful.

Well, for the last 1.5 years, it was very difficult to be active on a very broad front in the market, but we have restarted that in the last couple of quarters. And the response is very, very positive. The doctors, when they see the data, are really impressed. And we are working on several clinical trials to generate more data. And the more data, the more we will confirm the application. Frankly, a quarterly monitoring for 5 to 10 years post transplantation is probably what makes sense. And we are working to get the data for that. And we're getting more and more comparative data between the different tests because the TRAC test is a bit of a similar principle than the test that Natera and CareDx are doing. So we can compare the power of TruGraf, which is much more sensitive for subacute rejection than any other test, and we see in which cases which apply. So the combination of the 2 tests is extremely powerful, and we're the only one in the world to be able to offer that. Of course, we have to make that known, and that takes time. And then the hospitals and the doctors have to switch their programs and establish their standard of care. So it's not an immediate process, but the upside is enormous as you pointed out, even if 1/3 or half of the patients were monitored, you're talking of enormous markets. So we are working on that. We're also working on making the cost of those tests more affordable. So we're changing technologies to have our cost of producing the test lower. And we're investing a lot in that start-up because the potential is very, very big. And I think in 2023, we could see some quite significant numbers there. You know I mean I'm very conservative, and I try to make sure Eurofins is very conservative when we talk about future things. But if you look at Natera and CareDx communication, then you will see different -- a different perspective on talking about the future. And then you can decide if you think their numbers are likely and you can decide if you think our test is better and which one will prevail, but that gives a very, very broad range.

[Operator Instructions]

So we can take maybe the last question because we're going to run out of time soon.

[Operator Instructions]

All right. So it appears we have covered the subject. It's just a quarterly topline update. So just to conclude, I think we've had a very strong quarter. Once again, we've exceeded our objectives. We are conservative when we set objectives for the future. We will update the objectives for '22 and '23 when we present our 2021 objectives. Overall, we are continuing to build the group. We are having actually more success on the M&A front than we're thinking. We see our markets very positively. The outlook is excellent for pretty much all of our markets. This hasn't changed at all after the summer. And I think we're in a good industry. We are resilient in times of crisis. And in good times, we can grow even faster, and the markets have been primed so -- by the pandemic for more demand for testing. So overall, we remain as optimistic as ever about the future developments of our group. And we thank you for covering it. And for those of you who are investors, we thank you for supporting our investments in the growth of our company and our endeavors to provide new capabilities for testing for life. Thank you very much.

Ladies and gentlemen, the conference call has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day.