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

So a warm welcome to another virtual fireside chat at the Morgan Stanley Global Healthcare Conference. I'm delighted to have QIAGEN with us today, a leader in molecular diagnostics. My name is Mike Jungling, and I'll be a moderator for this session. We have 30 minutes for this call. [Operator Instructions] I've been asked by our compliance department to quickly mention a couple of disclaimers. And here I go. This webcast is not for members of the press. If you are members of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley website, which is www.morganstanley.com/researchdisclosures. And if you have any questions, please contact your sales representative. It's now with good pleasure to introduce Roland Sackers, CFO of QIAGEN, but we also have with us today John Gilardi, VP of Investor Relations. And with this, I would like to hand it over to Roland for some opening remarks, and then we'll go into Q&A. Over to you, Roland.

Yes. Thanks, Michael, and thanks for having us and pleasure to be here. I'm very much looking forward to the good days when we have physical meetings. Having said that, it's quite obvious that the first 6 months were clearly also challenging months in our whole industry, while we had, I would say, overall, a good performance, we were able to beat our own guidance, actually in terms of both, in terms of revenues and in terms of profitability. It came clearly also, quite visible is that COVID stays very volatile. Because of that we're adjusting our guidance in early July and taking some of the COVID impact we were expecting for the rest of the year. and rather pushing that into potential upside, while our guidance focused on the non-COVID business, which is clearly important for us as we grow our business in the long term. Nevertheless, since that, a lot of things, again, have happened. But it's quite obvious that in the U.S., but also to a certain extent in Europe, COVID delivered this volatility we were talking about. Good reference number is, for example, the PCR test shipped in the U.S., per day, which was on the peak last year, $1.5 million per day. In June this year, 300,000 as we speak today, somewhere between 1.2 million and 1.3 million per day again. So you can see quite a volatility. Same is for Europe, some countries clearly have seen that the variance pushed a lot of testing requirements and also political reactions are very different. You see that in Europe, for example, the political turn sentiment somewhat against what I would call the antigen test by that because there is a sentiment now that cheap testing and brackets keeps vaccination levels low. so rather try to push that out of the system. It's different for PCR-based testing because that is rather much more symptomatic. It also doesn't get paid from governments, it typically get paid by insurances. So again, also here, you see very different influential factors. As I said, much more important for us is the non-COVID business. And also here, the good news is trends remain very stable. We see, for example, I've seen that the first 6 months, a sustainable improvement for QuantiFERON latent TB test. Here, we called out for the guidance for the year around $255 million in revenues. That compared to $190 million last year or even to around about $240 million in 2019. So you can see it's much more than a recovery. It's actually also showing that there is, I would say, an underlying trend. Similar is true for sample preparation also here while on a sample preparations, which is COVID-related came in as volatile. It's -- the DNA part was very strong. In the second quarter and also the third quarter probably remains on similar levels. So all in, things, I would say, are well on track for us to make our revised guidance. You will see what COVID does to the upside here. But it's quite obvious that the placement numbers and the overall also macro environment in terms of funding NIH budget, but also pharma companies trying to go back to a more novel lab environment are incrementally positive for QIAGEN. With that, I'll probably open opportunity for asking questions, Michael.

Yes. Good, good. Thank you for the quick overview. And I will focus obviously on the core business in a few moments but I do feel that a couple COVID-19 questions need to be asked. And when it comes to the testing side, you mentioned, you are sort of close to 1.3 million, that was the previous peak. Given where the infection rates are going today, do you see a scenario where we go beyond 1.3 million tests.

Again, that is the market number, that casual number. But nevertheless, it's first and foremost shows, it is the volatility, right? And again, nobody was expecting, I would say, 4 weeks ago, that there is quite such a turn in what we still call the summer, what if there is a sometimes, see you on your way in Germany. And it's still the summer season and so I would say that turn was quick and everybody is looking for indicators. The one we are following quite closely is also always a country of Israel. Because Israel is typically quite well advanced if it comes to, as you know, to vaccinations. It was also quite well advanced, and I would say, getting that around a large number of cases and also the booster shots. But at the same time, we see more and more breaks in terms of -- in the U.S., for example, now since the latest number I've seen is that 20% of the people being positive, they tested are fully vaccinated. So it's a quite significant number. As I would argue, it is very hard to read whether it's going to go.

But certainly if you look at Israel, given it was one of the highest countries for vaccinations. I think as of last week, it was one of the highest per capita caseloads in the world. It's -- it seems a little bit worrying. And on the Israel side, I mean, if you look at that data set, it does make you worry a little bit about COVID-19, but also the opportunities than could lie ahead of you for the next 1 or 2 years, i.e, it's a more sustainable opportunity than we first thought. Is that a reasonable comment to make at this stage?

Where I would agree is that it's quite obvious that a certain level of COVID tests are going to stay because COVID will stay as an infectious disease as any other infectious disease. I do think what is difficult for us is to determine what is the level of testing compared to the peak. And because it is very much impacted, not only by vaccination but also by variances, right, and how much they are covered by the vaccinations. I would say where we all agree on, and I think that's the good news is that the likelihood of larger widespread lockdowns are very unlikely in these days at least because politicians as well as trying to avoid that because there's an impact on the overall society as seen as too dramatic and too large which is also for us on the non-COVID side [ in front ] because the one thing we shouldn't forget, 85% of our business is a consumable business. So we need people who work in the lab and in brackets burning our consumables. So having, I would say, an environment where more and more people return to work, in our case to lab. It's good for non-COVID. And we are far away from normal life. And there's still -- as a majority of people are not back into the day-to-day work. I would expect that it's going to happen in the second part of the year outside any larger events, which is, I think, is probably more important news for us.

Maybe we can quickly move on to sort of syndromic testing because if I look at QIAstat-Dx, it's seen a nice demand for PCR testing. But I'm curious about how you think that installed platform will behave going forward. And in a way, has it been a good thing that we've had a recognition of multiplex systems, and therefore, it's brought the demand forward. It has helped to make the awareness larger within hospitals. How do you view that?

It kind of started as a platform, as we said, PCR-based platform at QIAGEN for decentralized solution rather on the low throughput side. And I would say it's very straightforward that also pre-COVID, there is a significant trend for decentralization for 2 good reasons. And COVID clearly boosted that. First of all is time-to-result, being closer to the patient, because typically these systems, delivering it out to somewhere between 45 and 60 minutes, so the patient can wait for that. And -- but the second thing, they also, of course, generates incremental value for the hospitals, for the doctors because instead of sending it to a centralized lab, it can happen, not only, I would say, a faster answer, but clearly also getting incremental reimbursement for themselves. So I think both is going to drive significant position trend going forward. So benefit we are seeing, clearly, with QIAstat is -- there is a system, which I would say has an outstanding workflow. It's a cartridge-based system, very easy to use. We have in Europe, I would say the most important test on this day is available. Where one is, clearly, respiratory, including COVID. The second one is gastro. We're going to add meningitis. So that, I think that's important, and that trend is going to continue. I do think we have to understand that, of course, while now the majority of revenues is respiratory/COVID related. So there has to be an adjusted over time. But as I said, nobody knows exactly how much and on which time frame that is going to happen. Placement numbers are going well. I think we have now more than 2,400 systems placed in more or less 18 months or so. So I would say that's actually quite good.

Do you have a sense of what the utilization is currently for QIAstat and of the installed base? Are we 50%, 60% utilized in terms of throughput?

Yes, it depends, of course. I would say it's very much seasonality also in that. I would expect, for example, if you assume what we do today is that the flu season, end of this year will be a different one than we had last year where we all were wearing our masks, where we all had social distancing and there was literally no flu season. That will be a very different number, whenever, Q4 or Q1 next year because it's quite obvious that a symptomatic test is that, that test what you want, because you have, whatever, fever, you have something in your throat. And so that is then when you want to know, is it a regular flu? Is it COVID? Then utilization numbers go up quite dramatically. So I would say, in average, we expect that utilization numbers should over time become kind of a onetime purchase price instrument. So I would say that is something that we see as we growth.

Because I suspect if you want to make QIAstat work really well, you need a few more panels to be able to replace, the respiratory panel over the coming years. You mentioned meningitis, anything else that's planned over the coming years for panels?

Again, as it is PCR, it has a full flexibility. I think you can even go over time. I would say there's nothing that we're going to do now over the next 2, 3 years. But clearly, the direction of oncology because also here, you have a nice opportunity and clearly a market demand with faster turnaround to the doctors. But I would say these 3 panels are clearly what I would say probably making today 90% of the market.

Good. And last sort of question really on COVID-19 and that is sort of antibody testing and can I get a sense from you how think irrelevant it will be to test patients for antibodies to see whether the vaccine dose, the response is still adequate enough or whether you need to booster shot. Or is it something also that's going to be with us for some time. You have a view on that, please?

It is an opportunity. We see it rather as optimistic opportunity for us. So it's something which can create some upsides. Happy to take on that. Our focus is clearly on the PCR side, because it's again -- happy to sell a COVID if it also -- if it serves our long-term non-COVID business, onetime COVID revenues without any longer-term benefits. It's easily to do fine, if not, we feel focused around our 5 profiles.

Perhaps we can now sort of focus on your base business, which I guess is what people pay for the in the long term. And so If I look at your business, ex COVID-19, I think before COVID-19, you were a mid-single-digit organic grower. How should investors view the growth rate or so over the medium term? Are we talking also 5%? Are we talking a little bit more or a bit less? Just some numbers, some color around that?

Yes. Clearly for this year, given the lower base, of course, we are aiming for like kind of 20% growth rate for the full year. So I think that is a very nice recovery and also speaks for what we're seeing as coming out as flash growth, rather. We're clearly seeing also that products like QIAcuity, our digital PCR platform, should deliver an acceleration to the overall underlying non-COVID growth rate. So I would say, a range from mid to high single point is what we should aim for and just QIAcuity by itself, while if we are able to, what we believe, to place 600 instruments this year can make a nice difference.

Now you mentioned digital PCR. Can you sort of comment what your plans are, what you're seeing the magnitude of the opportunity?

qPCR is clearly a very nice conversion story. So while we have seen some of our peers did a very nice job over the last 2, 3 years, growing a business here, I think north of $200 million in revenues. It also has shown that it is a conversion from the traditional qPCR business, which I do think is a market size, as of the day, of 2.5 million. If you now look at our offering, where we believe we have a better dedicated instruments. It's not one instrument, there's 3 different types, depending on the volume you are planning to do, you can pick them more or less the right size. It's very well received by our customers. At the end of the day, it allows you with the same cost per sample to get instead of what I would call analog results, digital results, and therefore, incremental information with no incremental cost. And that attracts a lot of customers. And we will see that conversion going to increase, and it's still early. So I would say put-through ratios of this instrument are lower part of revenues, but a lot of stuff is where this is coming from, the placement of the instruments. So there's upside to the growth rate. So as I said for this year, it will be north of $45 million in revenues. We feel we're on track.

I guess if you want to sort of get to the mid- to high single organic growth rates, you may do something with your sample prep business. I think QIAGEN sort of holds a meaningful or a strong position in this space, but it's not really the fastest-growing business, probably 2% or 3% is my guess. What can one do at QIAGEN to improve sample prep growth rates?

A couple of factors. For example, I believe that overall, not only for QIAGEN, but in general, I would say, the healthcare sector is going to be very differently funded, that it was before. If you look, for example, just on the NIH budget, again, I think, we are both long enough in the business knowing NIH budgets typically going like mid -- low to mid-single digit areas. So, I think, they are kind of buyer deposits rather 20%. I think it will add probably most likely like 12%, 14%, significant improvement. Similar situation in Europe. And as I said, same is true as we see with pharma companies. Most of them were very much focused on nothing else and COVID. So I would assume that for them also to catch up a bit more the R&D spending will improve, and that should be helpful for sample prepared, in general. What is being helpful for us is a couple of things that, furthermore, we have seen nice placement numbers also in symphony with others. So there will be a utilization trend. We see, in general, that VIDAS also, of testing as a general population and the impact testing or prevention mix is a different one. So I'm quite sure that we will see larger volume for that reasons, going to the system, in an environment where we were able to gain market share, particularly in the low and mid through-put environment is being helpful.

So when do you sort of give an indication of mid- to high single-digit organic growth. What are you assuming for sample prep over this time horizon? Are we talking about 4%, 5% as well? Or is it still more in the area of 3%? Just curious where you think that will...

Yes. It depends a little bit on how you define it because again, digital PCR is clearly a part of it, shouldn't forget that. So I would expect that it's probably -- it should be a step higher than the cost portfolio.

Okay. Can we talk a little bit about the impact of sort of COVID-19 on the base business? And I'm curious whether COVID-19 has had any -- has worsened or improved your growth prospects. I would have thought it's improved only because areas like multiplexing will probably pick up from here. But just wanted to confirm with you, how you viewed the longer-term implications from COVID-19 on your base business?

Talk about some macro side. I can least set aside, which I do believe has improved substantially, not only for QIAGEN, but for the industry. So the second topic, which is clearly incrementally helpful for us -- sorry, and probably more of that for other companies is the success of our platforms. Of course, we shouldn't forget that in 2019, QIAGEN made a quite significant strategy change by stopping the development of our next generation and seeing development, while the partnering with Illumina, but probably more important, pushing all 3 brand-new platforms forward, QIAcuity, NeuMoDx and, clearly, NeuMoDx. We didn't know, of course, at time that there was COVID coming up and pushing even further. And again, if you compare our numbers today with once we had said, before we went into COVID, it's quite obvious that we gained here a couple of years, particularly in terms of placements. But I do also think that the overall trend is even more than that favorable because once you will see a couple of things going to happen. There's clearly a market with COVID developed, which will disappear over time, which what I would call is the ultra-high throughput market. So state-owned facilities just one topic, COVID testing. These instruments will more or less go back into the full loss because volumes will come down and some of this volume done there goes into the more regular environment, what I would call it like a [ quest of the lab COVID ] environment. QIAGEN never took part of [indiscernible] high throughput. Our market is always it's mid-throughput market. And I do think that is beneficial for us because then, again, as I said, will be more -- some of that is going into that segment incrementally. But even now if you make the case that there is excess capacity in this environment, which you can, then I think the benefit is if you have some of these customers, which kind of estimates they are going to disappear, so once they bought over the last 12, 18 months, which are typically -- should be state-of-the-art quite flexible or the ones they have in use as well, which are, I don't know, 3, 5, 10 years old, yes. The benefit is, there is no 3-year-old QIAstat, there is no 5-year-old NeuMoDx. They all were new. So I would say that the features should help us. It's quite obvious these are separate, for that, I want to stress that. Yes, we still have to build our portfolio for the years for NeuMoDx, but we have a full portfolio XCS, we have [ 14 ] panels, it's what you need. And QIAstat, we are very comparable already today. So I think that should be clearly compared to others giving us a good situation.

And can we briefly also move on to sort of funding of the academic and the pharma side and how this sort of benefits your business over the midterm? I'm curious on 2 things. Firstly, if I look at the number of IPOs that banks have done this year, VC putting companies to market. It seems to me that the demand for academic solutions that you sell is on the rise as well as sort of research solutions. Can you comment on that whether that makes a difference? Or are we just in a little bit of a bubble of people wanted to buy into these biotech IPOs?

I always like to see if customers have more money available than less money, so I think it's a good trend, so keep on the good work. But I do think it's clearly also to understand, it is -- the funding is coming from different sides. Again we talked about -- I think, there's a general understanding that funding in healthcare has a significant benefit to what -- particularly on prevention to supporting the system with that locked down scenarios that are much more costly. So I would expect that it's going to happen. Second, but we shouldn't underestimate, there's also a lot of stuff which did not happen over the last 18 months. There's clearly a lot of things stuck into the pipeline with pharma companies, with other industries as well, right? And having them going back to normal, having them, having people back into their offices will be helpful. Same on QuantiFERON. Again, had already a good couple of quarters now, but big market is immigration testing. I think we all would agree immigration is just barely going to start, right? Back-to-school testing is something what happens first time this quarter, wasn't really done in the second quarter. So there's a lot of things which still wait for normalization.

Okay. And quickly moving on to financials. We've only got, I think, 2 or 3 minutes. I'll ask 2 questions at the same time to save time. Firstly, when it comes to financials, your margins are sort of in the low 30s, pre-COVID sort of 27-ish? What does COVID-19 mean? Does it mean a business that is now structurally better than it was pre-COVID and I am talking about changing the way we do things, but also maybe some sustainability over the coming years in a good margin PCR testing?

First of all, I think we have to remind ourselves that QIAGEN clearly always has margins, which are probably in the top quartile of the whole industry. While I don't think that there are too many companies in your coverage which have similar margins profiles that we have. Nevertheless, I think it's also fair to assume that the margins we are probably having this year, we will see how end, adjusted EBIT 33%, 34% growth we will see that is something what we are not able to keep if we assume that there is a softer COVID environment going forward. At the same time, we will see from experience, a base impact so that compared to 2019, where we are seeing around 27%, we should do nicely better than that. So I would put us somewhere between -- it really depends a bit on how non-COVID is going to develop. And of course, how much COVID is to remain in the system. Having in mind, when we have given guidance for this year, in July, our assumption is that we have got about $600 million COVID-related revenues, but that includes, of course, our definition of COVID related also means that we had $150 million COVID related revenues in 2019 because a sample prep, it can't tell you exactly where the customer is using it, so we're using on customer groups -- product groups. This $150 million probably developed now in the meantime to $200 million. So we have roughly incrementally $400 million COVID revenues in our numbers this year. That will come down somewhat, who knows, what level. If you know, let me know.

Okay. I'll give you a call later. Last question from my side. Otherwise, I'm going to get my -- I'm going to get in trouble. But in terms of white spaces, you've got plenty of cash. You've done a share buyback. Curious about any meaningful white spaces that you would like to address through M&A over the years to come. Anything that you can flag for us?

Two things. First of all, you're absolutely right. We have a very healthy cash flow. The first 6 months, a very good cash flow, will continue for the rest of the year, plus a good cash situation. So we're comfortable with our capital allocation policy to do both share, buybacks, while still reviewing bolt-on acquisitions. We feel very comfortable with our 5 growth drivers. So you shouldn't expect us to add a 6 or 7 growth driver. But if there is something that enhance our portfolio, another test or one of our platforms, the bioinformatics and solutions, which enhance our capabilities and integrated that as well, happy to add. Again, I still recall that when we acquired QuantiFERON, it was a $20 million business. Now as I said, it's $255 million. There's a lot of things which you can add value on.

Okay. Look, we've hit the hour mark, and that means we need to -- we need to call it to the other session. I want to say thank you very much for participating in our conference and doing the Q&A with us and with that I would like to close the session. Thank you so much.

Thank you.