Qiagen N.V. (QGEN) Earnings Call Transcript & Summary

Great. Good morning, everyone. Welcome to the second day of Bank of America's 2021 Virtual [ Viva ] Las Vegas Health Care Conference. We've got a long line today, lots of companies presenting. To kick off this morning's session, I'm here with my colleague, Mike Ryskin. And our first company to present this morning is QIAGEN. With us from QIAGEN, we have CFO, Roland Sackers; Vice President, Head of Corporate Communications and IR, John Gilardi; and Phoebe Loh, Senior Director of IR. Roland, John, Phoebe, welcome. Thanks for being here today. Appreciate it. So with that, to set the stage, any opening comments or I can jump right into the Q&A. I got a whole bunch.

No. I will have just very few remarks from my side. And first of all, Derik, thanks for having us. Very much looking forward to the next year, hopefully, again in Vegas. As you all might have seen, we clearly had quite a strong start into the year 2021. We were able to beat in terms of both revenues and EPS our guidance, had a very strong underlying performance, particularly driven by our non-COVID business, I think we had an overall non-COVID performance of 16% growth rate year-over-year, and that was also particularly driven by a rather broader portfolio, not by a single product line, for example, doing exceptionally well. So it is something what gives us, clearly, I would say, a good start into the year '21. But also our COVID business did quite well. It was just, I think, EUR 3 million lower than the fourth quarter. So it remained on a very high level. And also here, it's quite obvious that while we seek and expect also in a way we have given guidance for the full year that the second part of the year, there might be a certain a lower level coming in, but there's clearly also volatility. If you take an example, for example, China in the first quarter was actually particularly strong for the 70%, 7-0, growth rate in China was clearly quite well. And while we also have seen an ongoing improvement on a quite significant way in China in Q1, most people have noticed that there were actually certain outbreaks in China also on the COVID side. And that, of course, what's also contributing to, I would say, the overall performance on the COVID side. Today, all these things, which I highlighted on a basis similar trends we see in the second quarter. We see clearly that certain areas like Brazil, like India, but even other states, which are fully vaccinated. If you go into the news and read about that shows that certain European countries where, while they have significant vaccination levels, there's still outbreaks. And that clearly means that testing still occurs. And probably what we see more important, we also see a certain change in testing, while general screening is on one hand side, which is clearly more and more genotyping testing done, sequencing is clearly also on the forefront because people want to know which kind of mutation is actually in the general population because it makes a difference for the efficiency of drugs -- sorry, of the vaccines. And therefore, I think also here, I would say, certain trends, which probably will be helpful. Last but not least in terms of profitability, also, I would say, an overall good quarter. Gross margin was around 68%. That was driven by all the investments we're doing into building out our production facilities on the non-COVID side because we believe there's also, I would say, a certain need for largest products going forward, and we do that right now. And at the same time, there was clearly a good leverage on the SG&A side. So again, having a 34% adjusted EBIT margin in the first quarter of the year, I think, was also good start. With that, Derik, I hope that leads you to a good number of questions.

It does. It does. I'm just going to start a little bit big picture first because this is the number one question I'm getting from investors. Look, I mean, you guys have done a really good job of articulating the positive structural changes that are going on at QIAGEN that have happened since Thierry became CEO. Transparency has improved. You've given investors cover -- some color on the COVID [indiscernible]. You've highlighted your growth pillars for the business. However, the stock is still lagging. I mean, it's trading below EUR 40, 14x '22 EV to sales. It's at a 5 turn discount to the peer group. I'm just a little bit perplexed at this because I think you guys are doing some really positive things, yet The Street seems to be not appreciating what's going on with this. I'm just curious, what are you sort of hearing because most of my calls from investors are rather frustrated because QIAGEN has clearly made some major changes to the business in the last year or so -- over the last year, and you just don't seem to be getting credit for it. I'd love your sort of general thoughts on it.

Yes. I appreciate your positive views on that. And I think it's also what we're hearing from more and more investors that clearly see a change in the way the company, again, is executing. Again right now sixth quarter in a row where we actually were beating our guidance in terms of both revenues and EPS. And also what is probably more important for our growth. Well, actually, all doing quite well and all of a sudden have, I would say, a very substantial possibility post-COVID. Nevertheless, I think we shouldn't forget what QIAGEN went through, particularly also last year, and that clearly also leaves a couple of things, which still have to clear out. Again, we have seen over the last couple of months, clearly a change in shareholdership. And that is clearly something would take some time and has to wash out. And we also hope that it's stabilized now and moving forward. Of course, the good news is we have seen quite a good number of -- again, whatever you call it, but I would call it, long-only investors, which are -- were used to be shareholders of QIAGEN for coming back into the stock. And I think also the interest in the stock, just over the last more or less since we have given results shows me that more and more investors try to learn about QIAGEN, about our perspectives. And so I'm quite hopeful that things are now starting to normalize. What is now in our control is something that we really want to focus on which is execution, deliver what we promised and, again, at the same time being as transparent as possible. But everything is in our hand again. But what is in our hand, we want to really deliver on.

Great. Then let's talk about the business. So you had roughly around $200 million in COVID testing in the quarter. Feels like, by our math, it's going to come in somewhere between $700 million and $750 million for the full year. I guess what do you think is the durable COVID tailwind beyond 2021?

As I said, I think the good news for us was really that non-COVID business was quite strong, but also the COVID business was actually on a high level in Q1. And we do also expect that particularly also in the second quarter that continues. Again, if you look on what we have on hand and demand in, I think there is something what is quite visible. For the second part of the year, we clearly took a more careful road in the way we guided that we're expecting some softness. I do think it is very much depending also how the rollout of vaccine is going in the western world and what is the kind of penetration levels we feel and then where we get to. At the same time, I think the encouraging news for us is that actually the non-COVID business is doing better than we though. We clearly expect also a sequential absolute dollar growth quarter-over-quarter, which I think is probably at the end of year is the more important part of it. Moving into particularly, so I think, first of all, just to remind you, when we talk about how we present, and I think it's the most transparent way we have given it before. Let me we talk about COVID revenues. We are clearly looking on the product groups, which are affected by COVID. It's also the reason why we officially reported also 2019 COVID revenues because that's clearly [indiscernible] done as well. So by definition, it will never go on 0, right, because it always will stay on a certain level. And again, what we're seeing right now is that the testing is changing. And that will most likely continue. I'll give you one example. As part of our overall COVID general strategy is clearly kind of start symptomatic testing on decentralized platforms. I think it's also quite obvious that this year or end of last year, we didn't have any flu seasons because we were all very good in wearing our masks and keep social distance or whatever. And if we would assume that the whole situation is, it's quite realistic to believe that, that might change in the next winter season and symptomatic testing becomes more important because suddenly people might detect, let's say, coughing or fever or whatever and to go to the doctor, and of course, we do not only want to know do I have COVID yes and no, but we want to know what we do have. So there's other markets then spiking up. So I think overall, while we expect there's softness, I don't think it becomes to a cliff also next year.

Great. So let's stay on QIAstat for a second. Can you -- any update on where the installed base is? I mean I think you had 1,000 systems in place at the beginning of the pandemic. I would love an update there. And also, when you're looking at placements, how much of these are greenfield placements and labs that have never really done multiplex testing versus where you're going in against is really an existing platform, say, from bioMérieux or GenMark?

I would say, overall, it's clearly a quite wide market with a lot of opportunities. And there's, I would say, overall, still, we are quite early in penetrating with this decentralized system, the overall market. A lot of professional customers actually globally, meaning labs, meaning hospitals have -- are buying into that because it has incremental value for them also ex COVID because turnaround times is always somewhere between 45 and 60 minutes. In QIAGEN, you clearly don't have to share the value all the time with a large organization. We try to keep it in house. And again, you have quick answers, and I do think that creates, I would say, a significant advantage for customers. So we would say, mostly sometimes competitive situations. And we have customers buying a certain and for us instrument, and it's a different one. But a significant part is clearly other companies just starting with that and are quite intrigued with incremental offerings. I would say so far, there was clearly, particularly last year, a big focus on respiratory. But as you know, there's also a significant gastro market or meningitis and others. And I do think these things are going to normalize over time.

Great. So going to the -- talking about the sample prep business for a minute, the supply shortages that sort of quite companies the point your customers at the beginning of the year seem to have alleviated to a certain extent. In fact, I think it was interesting sort of about the sample prep market. I mean, when Mike and I were in the lab many, many years ago, although Mike, more recently than I was, I mean we all use QIAGEN sample prep products. And your competitors, who come to us and offer a 50% discount and nobody would change because it's too much of a pain in the butt to change. COVID clearly switched that up a bit because people now had to go out and validate other vendors. I guess how do you sort of see the sample prep market sort of shaking out post-COVID? Do you think there could be some share shifts, some potential pricing erosion in that market? I'd love to get your sort of thought on how you sort of see that sample prep market evolving given the unprecedented blender that COVID was.

I think it's quite obvious that we do believe that we actually overall COVID was actually quite helpful for us to extend our market share on sample preparation particularly on customers who are long-term customers. What I mean this is, first of all, you have seen the results in Q1 where sample preparation, in general, had a significant double-digit growth rate. And again, last first quarter was still a quarter, which was 2 quarters a normal quarter. And just the third quarter was affected. And again, also the non-COVID sample preparation, we have seen a significant double-digit growth rate in the first quarter. Second, look at the number of automation we sold also in the first quarter was north of 40%. And a lot of that was also sample prep instrumentation, right. So I always hear an argument there was so much instruments sold in the past and doesn't that lead to a situation where there's too much instrument in place. And I think what people sometimes don't realize is that sample preparation in a normalized environment is not a high-throughput setup. It is rather low to mid-throughput because customers like to do many different tests at the same time. And so a lot of instruments sold on the high-throughput side, which for another market on the sample prep might disappear because these were instruments bought by government that is very focused on COVID. Outside COVID, they're not doing anything else, right? Whereas the typical labs, the lab corps, whereas the hospitals, they want to use this a typical setup and might get some incremental COVID tests and all that, but they stick to what they're used to, and again, the growth numbers were on both on a sample preparation but also which is COVID and DNA sample preparation which is a non-COVID part had a good performance, and we don't think it's going to change.

Great. Great. Can we -- let's go to QuantiFERON. Nice tick up, 22% growth, I think you saw in the first quarter year-on-year, constant currency. How do you sort of think about QuantiFERON recovering for the rest of the year? And I guess can you sort of like give us some background on your DiaSorin collaboration? What is sort of like having that automation option do for the business?

As I said also, QuantiFERON was off to good start, 22% growth rate puts us clearly good in a position probably even being better than our full year guidance on that number. It's quite obvious that on the one side, you could argue there's, of course, a certain part of the business, which is more or less something that was distorted over the last couple of months and now might add on top. At the same time, I would also argue a lot of that business hasn't even started because if you recall it, QuantiFERON is, also to a certain extent, a back-to-school testing. That really hasn't happened in Q1. That might happen singly just in the U.S., most likely this quarter or after the summer in the third quarter. It is very much an immigration test as well. I would argue that in U.S., there wasn't too much immigration in last quarter. And if at all, it might restart going forward. So there's a lot of things where I would think there's even more positive, but that's actually also true for Europe and other countries, right? So I think there's more stuff, which will be more positive momentum for that product in the rest of the year. I think -- do think also that we're clearly benefiting from the overall situation, and also DiaSorin had a good year last year in the number of placements of LIAISON placements to the numbers [indiscernible] QuantiFERON has significantly increased. So there's many more opportunities for our customers out now to start with the QuantiFERON. That's not what they're seeing because DiaSorin organization is clearly very enabled and very capable in utilizing that now to this line as an incremental product on that. I think that will be also incrementally helpful. So I would say we expect that QuantiFERON continues to be quite strong for the rest of the year.

Got it. And any thoughts on PerkinElmer's purchase of Oxford Immunotec and sort of like how that changes the equation any, if at all?

I always like to see this kind of variation in the markets as long as I'm not on the acquirer side. Second, I don't think that is something where we believe that at least short and mid-term changes too much. I think we clearly have a leading product, leading offering here. We have a good footprint in that market. Again, we clearly have to watch it, call it, mid or long term, what might change. But again, have in mind that market was always competitive. We have other players in that market, so I don't think it is something where we are not used to competition at all.

So looking at QuantiFERON and QIAstat, NeuMoDx, I mean these are all things that you've acquired. How should we sort of think about your capital deployment strategy going forward? And sort of what's changed versus the past? And then this sort of flows into a next question on margin expansion. How you're balancing investment in the business, the COVID headwinds and the sales of these much higher-margin products? So just some M&A strategy and sort of like how all this -- how all these changes like flow through the margins.

Look, for -- just to be precise, while we have acquired some of these technologies as you rightly referred to, I would say, by far, most obviously, value generation comes by in-house development because you clearly have things to get it approved. You have to improve some automation and so on. So I would say there's also still quite a significant QIAGEN part to all the products you just named. Nevertheless, I do think what we said publicly is still very much true. While we do believe that gross margins are going to improve starting next year because this extra costs we're having right now on building our capacity, extra validation and related costs taking a toll, plus I would also argue the mix gets more favorable in middle and long term. We're still investing significantly in R&D because all the year preparation for the non-COVID times is important on [indiscernible], for example. We, I would say, have a full menu on tests for Europe or ex U.S., I think, 13 or 14 fully validated tests. But yes, we clearly need more. So there's significant ongoing investment to that and that carries to '21 and also into '22. So that's clearly one thing where you should expect rather an increased R&D spend. On the other hand, SG&A is still a nice leverage opportunity for us. COVID changed also not only the base. And as I said, the base will be clearly significantly higher post-COVID than pre-COVID, but also way sales are done has changed quite dramatically, right? I'm quite sure that this nice micro island conferences with everybody with backpacks and sandals running around. Not coming is strictly [indiscernible]. And we're doing 60-plus percent of our revenues via digital channels today. All our instruments -- new instruments work like hotel mini bars, right? You take it, we order it, right? We don't have to worry getting orders. So I think the world has changed somewhat being helpful on some of the sales and marketing costs.

Yes. I mean, that's one of the questions I have down here is basically how you think the world has changed and QIAGEN's changed post-COVID and sort of what differences in this business. I mean, it's going to be interesting on the scientific conference one, for sure. I don't know how that's going to roll out. I mean I think the day the flying to Europe to give one presentation are done and sort of that type of stuff. But I'd be curious sort of like your general thoughts on just sort of like how you sort of see the world evolving post-COVID and your business evolving post-COVID? What's going to change at QIAGEN?

As I said, I do think that -- I hope, we really hope that we have a certain normalization. And what I'm quite sure, as I said, that certain things will be very different. And I do think material for us is on the SG&A side. Because it's quite obvious that, again, customers getting used to digital selling, digital offerings. If I see how successful we are with our video trainings, we have virtual PCR days where literally thousands of people are signing in, a number of people you never reach as easily in the past. And they can clearly pick a topic. You can see how successful our videos are in introducing new products. I think that, that has an ongoing impact. At the same time, it's quite obvious that people like me, CFOs and whatever, are clearly now viewing the stage and saying, okay, a lot of intercompany travel that was done in the past has not proven not to be necessarily on the high list and then that you can set that. I'm quite sure that more and more work will be remotely done. And so again, it also changes the cost landscape quite significantly. I think it comes also with a lot of risk in the western world because I think also employees might figure out over time. If I'm just remotely, then the question is, why should I pay New York remote home price if I can hire somebody in Wisconsin if he doesn't come to the office at all. So the world is going to change, right? And so more important for us is probably that we also see that on the R&D side, things getting fast rather close to the finish line. We had the benefit of 2019 starting with 3 new platforms: QIAstat, we talked about, NeuMoDx, but also QIAcuity our digital PCR platform. And we are still very early. So every placement clearly generates and hopefully generates even more going forward recurring revenues, and we all have seen on the QIAsymphony side how beneficial that is to the company, if you have a good visibility on recurring sales, and that is something where we're really aiming to.

I think...

Go ahead, Mike.

Sorry, Derik, I'm going to just hop in real quick. On that comment of sort of -- on that theme of what's going to be different post-COVID and sort of what do you see as the winning impacts on this, I mean one of the dynamics we're seeing throughout the markets is a bigger focus on health care, bigger focus on pandemic preparedness. And I don't mean it's simple as just sort of a stockpiling PPE and getting diagnostics ready. It's more about investment in science, investment in research. So there's a lot of money being thrown around. And if you had to look at these numbers and some of these are obscene amounts of dollars in terms of funding for this. How do you see that sort of translating into your pockets? Some of the raises for funding are seen, but what does that actually mean for scientists on the ground?

Thanks for bringing that up because it was the next point I wanted to go to because it's quite obvious that the awareness, not only in health care, but particularly also diagnostic and prevention is a very different one today than even 12 months ago. Everybody liked so much about testing, about, again, what you can do differently. And you see also that the public funding is flowing much more in that direction to see where NIH budgets are going, where you see European funding is going. And even outside COVID, right? COVID again, there's still a lot of money going in. But also outside COVID, you see, I would say, a good momentum in the overall environment and also pharma companies, for sure, will, at some point of time, going back to the, call it, more regular health care opportunities ex COVID. So we see that already happening. And we should also have in mind, we are still very early. We're opening. Again, best example for me is if I look on QuantiFERON customers, but I would say, in the East Coast side, QuantiFERON is probably back to, I don't know, let's say, somewhere 70% to 80% of pre-COVID. There are -- where on the West Coast and other parts of the U.S., we are clearly below that, and Europe is insignificantly below that. So it's not like that we are already there. So again, we're still ramping up, and we all hope that there will be more openings. So I'm quite optimistic also on that.

Great. Roland, you mentioned -- you started to talk about QIAcuity. Where are we in sort of like the digital PCR cycle? And what's needed to sort of get -- what sort of applications you needed to sort of really get that market accelerated? Because it's been out -- digital PCR has been out for a while. And it sort of has been -- I would say, it's been slower to take off than I would have thought. So what do you think are some of the catalysts that could to drive it?

I think it's always helpful if there's more than one company addressing digital PCR market. And I have to say the company was doing that before QIAGEN ended up doing very good job and created a certain awareness. But I think it's actually helpful for both if you do that together, even if you don't do it together literally, but addressing customers about the advantages of technologies, I do think that is very helpful. And we have, as you know, as you said correctly, very good start into the year. [indiscernible] bought at least 600 placements for -- to add this year on top of that. And order books are filling nicely. At the end of the day, it is not a -- it is a story about penetrating the qPCR market, which is most likely a $2.1 billion market opportunity. We just have both companies in together penetrated a small part of that. And so the growth rate will be significantly the customers see that they get, I would say, incremental results on a similar cost base. So again, there is low switching hurdles once you're convinced. And I would also argue here, actually, the overall COVID situation, switching to digital into education, switching to channel had nicely to introduce this new technology to customers. I would expect that technology not only for QIAGEN but other companies will continue to do very well.

Great. And just one final question before we wrap it up. Can you talk a little bit about what's going on in your genomics NGS business? Where are you in sort of the reformatting of some of your GeneReader assays to Illumina platform? When can we expect to see some revenue contributions coming from that?

I say we had also here a good Q1 number. You have seen that. And I think it's a combination of both. Of course, I'll just remind the audience, 2019, we decided to stop to develop our own GeneReader instrument and rather join forces with Illumina. And I think, again, both have clearly core strengths, we most likely on the consumable side and Illumina has clearly an outstanding reputation when it comes to the hardware and automation side. So I think it was a win-win move. On the other hand, its product is such that overall oncology business last year was challenging for companies. And also here with reopening and normalization, we do expect also a normalization of businesses, and again, Q1 was evidence to that. But on top of that, we clearly see also now within COVID a significant demand for, again, finding out which kind of mutations are more or less dominant ones. And that is only in brackets, fortunately, unfortunately, COVID business, which will stay for quite some time and actually grow. If you think on Europe or Germany specifically, Germany in December, only, I would say, number is like tested sequence every 900 positive case. Now we do this every [ 30s ]. So you can see that even if the number of cases are down, our business actually goes up.

Yes. With that, I think we need to wrap it up. Roland, John, Phoebe, thank you for being here. We appreciate it. Thanks for doing this, and have a great set of meetings. Thanks, everybody, for listening.

Thank you.

Thank you very much, Derik and Michael. Stay safe.