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

[Audio Gap] Jefferies in London. It's my great pleasure to introduce the next company in this track, which is QIAGEN. And it's our great pleasure to have here to chat with us today in fact, Roland Sackers, the CFO. And I think we've also got Phoebe and John here in the audience as well from Investor Relations. With that, Roland is going to make a few introductory remarks, and then we'll get into Q&A. So thank you very much for your time, Roland, and thank you all for attending. Thank you.

Yes. Again, thanks, Peter, and thanks Jefferies for having us. First physical meeting after a long time, so I'm glad to be here. Still somewhat not used to see so many faces without masks. So again, it's clearly something we'll, particularly Germany, have to get used to. Nevertheless, going back to QIAGEN, clearly quite a ride over the overall COVID period. We still recall October 2019 when we changed direction at QIAGEN in stopping our development of our own next-generation sequencing platform, and at that time, pushing forward 3 new PCR platforms, QIAcuity, QIAstat and NeuMoDx, which, of course, at that point in time, nobody knew that the pandemic was coming around the corner and clearly pushing all 3 platforms quite dramatically forward. Therefore, clearly, the pandemic situation was actually both on the one hand side clearly challenging for us, but clearly, it's as well good for businesses. And -- but it has changed. And it has changed in terms of mix contributions. While at the beginning, there was always a situation when the COVID-related revenues at QIAGEN were up, the non-core business was actually somewhat suppressed. Over the last 3 quarters, we have seen different trending there. We clearly have seen that non-COVID business is actually improving sequentially quite well. And we also believe that is going to happen not only for the fourth quarter but also going forward, because there is clearly a significant trend going back into normal operations for a lot of our customers, for the academic environment, for the labs, for the hospitals. But we're clearly also seeing that there's increased volatility around COVID-related revenues. And that clearly ended in a situation where in the second quarter this year, we had to decrease our guidance for the full year because of COVID, and we set it at that point in time to a level what we would probably call cautious realistic. Just in a way that we got proven to be wrong in the third quarter when we have heavily, significantly beaten our guidance by actually both, very strong ongoing performance on the non-COVID side, but also by an increase in COVID-related revenues. Nevertheless, we haven't changed our guidance policy. So for the fourth quarter, we still expect more or less the same philosophies that the COVID-related revenues are going down compared to last year, fourth quarter by roughly 30%. If I look around today, what is happening in the world, I'm not sure that is actually going to happen, but I think it's still the best way to deal with the volatility we see around COVID. As I said, non-COVID still very well on track, and most likely for another quarter. And we have seen that now since Q3 2019, that every quarter, we will actually either make or even beat our non-COVID guidance. So I think that is something where we feel comfortable in having our hands around. There's still clearly some volatility around the COVID side, and therefore, we also played it out carefully. In terms of growth drivers, last few words here from my side before we probably go into Q&A. A couple of comments. This, I would say, all 5 are on track to make the guidance for this year, particular on the QuantiFERON side or latent TB side. You see what I described before, a tendency to go back to normal. You see, for example, we have seen in the third quarter finally a back-to-school testing environment. That is something what we clearly missed in the third quarter last year. But also there are certain parts of the business are still not happening. One -- about 20% of our [ typical ] latent TB testing is immigration-based testing. It's not significant right now. We believe that's going to pick up. Nevertheless, we're going to mark an all-time high in terms of revenues around latent TB this year as well. Just to give you some numbers, 2019, we had $245 million in revenues. 2020, USD 190 million in revenues. This year, we are most likely going to surpass $270 million. So even north of 2019 on that business, even having in mind that certain parts -- subsegment of the business are not fully back. So it shows also clearly some good underlying trends. The same is true for a lot of our Academic environment. The one thing what fundamentally has changed, not only for QIAGEN, but I would say also for the overall industry, is that funding is not a current topic anymore, right? And if you look on NIH budget developments, for example, on the research site in the U.S., we're all long enough in the industry to know that this was an environment where we typically were happy having like 3%, 4% increase points per year. Current discussions for next year is double digit. I'm quite sure it will not be the 18% which I currently proposed, but it will be, hopefully, a good double-digit growth rate. So there is also similar trends in Europe. So the overall valuation of health care, in particular also on Diagnostics, is also reflected in research activities. Same is true for pharma companies. I think we all know that pharma companies will love to go back into more regular environments to work more on the oncology side again. Clearly also something what will be helpful for companies like us. With that, Peter, I'm quite sure that you have too many questions for me.

That's great. Thank you very much, Roland. [Operator Instructions] With that, though, let me kick off. Perhaps if you can just start, first of all, just talking a little bit about QIAGEN's contribution with COVID testing in terms of -- I guess, first of all, what are initially the sort of products that you saw a lot of demand for and how that, I guess, transitioned, I'm thinking manual to automation. But could you also just talk about a little bit now what the major COVID sort of product -- related products are when you talk about that 30% down year-on-year and perhaps where the surprise could come from?

Well, I think it's important to frame the numbers for you, because it is something where, as I would say, QIAGEN is a bit unique. Because it's quite obvious that we sell not only like products into the COVID business, which are very straightly identified, like for example, tests. But we, of course, also have like sample preparation products, which are going to be used for COVID testing, but not necessarily. We sold RNA sample prep before COVID, and that is the reason why we -- the way we separate our revenues, as you know, it's non-COVID-related and COVID-related products. Just COVID-related products for this year are most likely somewhere between $600 million and $650 million in revenue, so we'll see where we finally end. Nevertheless, we also have non-COVID related products in 2019 of $150 million in revenues, because, again, we sold sample prep for RNA extractions before. $650 million is probably turned -- assuming [ on a regular ] growth rate into a $200 million business this year. So I would say the underlying pure COVID impact is probably somewhere between $400 million and $450 million for QIAGEN for this year. Generally, there are 3 different areas where we are providing solutions to customers. One is, as I said before, it's sample preparation. Second is tests, like on panels, and NeuMoDx and the QIAstat platform. And the third is where we also provide components, for example, like enzymes to other companies. So these are the 3 areas where we see COVID opportunities right now for us. Going forward, if -- and again, that is a question nobody can answer, if and when and how the pandemic moves into an endemic situation, I think we all accept in the meantime that COVID will stay. It hopefully will not stay as a pandemic, but it will stay as an endemic. And -- but nobody knows what the level is. Is this 50% of the peak? Is it 30%? Is it 60%? It's too early to say. But it's quite obvious that certain parts will come down quicker than others. So delivering components to other tests is probably something what will go down more than, for example, providing respiratory panels as we do. Just very simply -- simple example, we are now most likely going into a flu season. We'll see if it heads -- ends this year, early next year. But as we all try to avoid wearing masks and social distance, it's not a top [ favorite by the way ] I see every night in a restaurant, there's a different likelihood that we have a flu season this year than we had last year. Symptomatic testing will come up, meaning people have a cough. But they clearly want to know, is it now -- is it a flu or is it COVID, right? And you need a different test for that. And that's again also clearly coming with a different price point, and therefore, you want to have a respiratory panel. So we'll see certain movements in the mix over time.

And I think you talked about the sort of, well, vague terms next year, you could see a $2 billion sort of sales line for 2022. What's your thinking behind the COVID run rate at the moment when you talk about that 2022 that we should be thinking about?

Our assumption is, quite obviously it is very volatile to predict and therefore, we stay cautious. So I think the Street right now is on about, as you said, $2 billion, which clearly implies a significant reduction in COVID revenues. Again, I'm not even going to give precise numbers on that because we have proven to be wrong one time in the summer. We are happy with our current policy, which reduces -- that was quite significantly for us and rather deliver every quarter and see what we have to say. For us it's important to be able to produce and supply to the market if demand is around. So we're focusing right now as on the non-COVID part of the business, where, as I said before, our 5 pillars of growth are all very well on track in terms of placements, but also in terms of revenues. Nevertheless, I think it's also important to mention that we have to see a certain rebalancing there. Like on QIAstat and NeuMoDx, it's quite obvious so these are 2 platforms we are selling. One is a decentralized platform. So something what you find in a hospital, for example, in emergency rooms, on a larger doctor office where you come in, as I said, you feel sick and you want to have a quick 45, 60-minute answer. Okay, what do I have on the respiratory side, on the gastro side. might be meningitis, might be any kind of different thing. Where NeuMoDx is a high throughput solution, what you find [ was ] in a centralized lab environment, but also something with a very quick turnaround time. Also for QIAGEN you have 60 minutes, where most competitors are around 4 hours. So I would say, there, of course, the mix is going to change somewhat -- again, talking as a person not as a CFO, lower COVID sales and hopefully, other things going up because we all know that a lot of things are also getting pushed out right now, which probably should be done.

And then perhaps you can go on to the 5 pillars there. Maybe let's start with QuantiFERON, as you mentioned that, you said sales this year likely exceed $270 million. I think that's a decent amount above the initial target you gave for this year. Can you just talk a little bit about what's driving that? Because -- I mean presumably, immigration is still not a particularly big factor at the moment in the world. So I mean what's driving the strong growth [ that's ] staying here?

So one thing what is going very well is our partnership with DiaSorin. As you know, we started early last year to launch our QuantiFERON test on the DiaSorin LIAISON platforms, it's 2 different ones, and -- which clearly make adoption for customers quite easy because they don't have to invest into most likely -- as DiaSorin has 8,000-plus placements out there -- without larger capital investment. So that is one thing. The second topic, of course, QuantiFERON is in many areas, in many locations in mandatory testing. It is -- for example, in the U.S., a very typical health care worker test once a year as a nurse, as a doctor, you have to get -- to be tested. Now as I said, it's in other areas like schools and others, it is in many areas a regular test. So you will see a certain normalization with an easier adoption with still being an area where you have to -- you have the opportunity to convert. Because the one thing which we shouldn't forget is that Latent TB test is around since 100 years. The majority is still the traditional skin test. You all know that. You all have a nice mark. Most of you, the older ones in the room, at least me, from the old days, where you had it as a skin test, but the skin test clearly has a significant risk for false positives. If you do that now with a modern test, like the QIAGEN QuantiFERON test, significantly reduced. Nevertheless, the conversion is still around 25% -- 20%, 25% of [ to ] old skin test. Even in the U.S., which is probably the highest penetrator, the converted market is probably around 40%. So there's a long way still an opportunity for us to convert that market, while the underlying market is still growing. So I think it's a nice market to be in.

And I guess you touched on this a little bit in terms of the opportunity, but perhaps you can just talk a little bit about the competitive environment as well, because I think there are people who worry about that. Can you just talk a little bit about how you think about the competitive environment for this?

Yes, I think there's, right now, 2 competitors in the market. One is Oxford, which is again in the market since 10-plus years. So they're always around QIAGEN. And again, we are both growing quite well. I think there's no change in magnitude. We are [ solving ] the same [ weights ], but of course, we grow absolutely every year how big their total business is. It's just -- and it hasn't really changed. The second competitor is this French company, where I don't know the name. But there's clearly a company which just recently entered the market. They launched it on the Vidas [ phene ] machine. So we'll see, they might have opportunities around greenfield opportunities. It's probably tough to compete with our existing partnership [ avanti ] DiaSorin because the instrumentation are different in terms of advancements.

Understood. And can you talk a little bit about then other opportunities with QuantiFERON beyond tuberculosis? I think you're going to Lyme disease. But can you just talk a little bit about as well the -- I forget what it's called now, the emerging market version of QuantiFERON that I think is a quite interesting machine?

Yes, as you said, we have -- on the one hand side, we have this, as we just described, this Latent TB opportunity where we still have this low penetration of the existing skin market -- skin test market opportunity. On top of that, we're just in the middle of launching a QuantiFERON-based TB -- sorry, Lyme test here in Europe, and U.S. probably end of next year. And it's clearly addressing a USD 400-plus million market opportunity globally. And the benefit of our test is -- or put it differently, the challenge around Lyme is that while you know that you have a tick bite, the disease sometimes develops very late. And with the traditional test, there is a high risk that you don't capture it. We are going to combine our test with DiaSorin's leading offering. So the sales process will also be then managed by DiaSorin because they have a significant franchise in that market. And the latent technologies, the QuantiFERON technology, then allows much earlier detection. So I think that is a significant scientific advancement, and therefore we believe it has a nice opportunity to grow into that market. The second opportunity we're describing is a latent TB opportunity for emerging environments, for rural environments, where you don't have a clinical setting, where you don't have a lab. And so we have developed a small device, where you can run without any lab facilities within minutes a latent TB test and have immediately a result. Something what is interesting for -- also for organizations like WHO and so on, who want to address TB. Because we shouldn't forget, there's still more people dying today because of TB than of COVID.

Understood. Moving on to the next key or [ to ] pillar of the discussion was QIAstat-Dx. Now I guess you -- perhaps it would make sense if we start off, can you just talk a little bit about the initial rollout of QIAstat-Dx in the U.S.? I guess the type of customer you're seeing use that. And particularly, obviously, there's an entrenched competitor, a funny French company again. I wonder if you can just talk a little bit about how you're gaining traction there.

QIAstat is clearly an interesting opportunity for us. As I said, it is still a very new platform. And unfortunately, we clearly were overwhelmed with demand for the platform in the late 2019, early 2020. And so we clearly had challenges in ramping up actually supply around the consumables side. We're now moving out of that because we're also launching [ here ] new automation -- automated production sites in Germany, which, again, allows us also to sell more platforms. Because the one thing what we did unfortunately, fortunately on purpose is, holding back some of these platforms, because the one thing that you don't want to do in our industry selling somebody a platform where you can't provide enough consumables. I think that is now -- which is all of it. And again, therefore, we're still moving ahead quite well. I think the last number we released was, mid this year, was 2,400 placements. So I think that's doing quite well. We see a good ramp that we're going to make our guidance for this year, which is north of USD 60 million. And probably most important for us is we feel well on track to launch a meningitis for Europe and gastro and meningitis guidance for the U.S. in the given timetables, which again is important to enhance the menu.

And I guess, can you just talk a little bit about how important COVID has been to QIAstat-Dx? And I guess I'm thinking when we think about sales next year as well. Is this a product where you're still confident that it's accelerated a rollout? Or is it a product where you think there was a bolus effect and there are going to be -- it will take a little bit of a challenge to utilization for next year?

Could now start with a disclaimer around COVID and nobody knows where it's going. But I think the more general statement is the times for QIAstat, meaning syndromic testing for COVID, is still to come. Because right now, the focus was very much on do I have COVID or do I not have COVID? Now going forward, it's rather, again, is what I described in syndromic testing. So do I have COVID? Do I have the flu? Which of the 22 different respiratory opportunities I can have catched is it actually I'm dealing with, or my body is dealing with. Second, of course, QIAstat has one significant advantage compared to others. It not only tells you how much, it also tells you how many. So it tells you what is your infection rate, which again is a significant information in treatment. So I would say the time for QIAstat on COVID -- again, not talking about the other stuff, which is at least as important, is probably still to come.

And can you just talk a little bit about -- I mean, clearly, this is a competitive market, I mean we've seen 2 big acquisitions in this area where DiaSorin bought Luminex, Roche bought GenMark, clearly there's [ other ] companies getting into this. Do you -- where do you see the biggest opportunities? I mean is it with the additional panels? Or is it more that this is still a very U.S.-focused market? Or can you just talk a little bit about how you see this market for syndromic testing evolving?

It's a global market, but it's clearly, it's a decentralized market, it's still a very much underpenetrated market. Probably therefore, also a lot of attention for that market. And I'm glad that we -- having paid $1 billion plus for that when we acquired our QIAstat business was [ rather ] a couple of hundred million. So I would say in terms of timing and of acquisition, we did a lot of things right. Having said that, it's a global market, but I also believe that the technology we are using, which is PCR, has a lot of advantages. So we could use it with -- as I said, we can also not only give quantitative but also qualitative results. We can bring it over time, for example, also into oncology. But again, it's probably not a focus for the next 2 years or so, but the technology allows us to move on beyond infectious diseases. And as I said, decentralization has advantages for 2 simple reasons. One is you are closer to the patients, to your customer, right, and doctors and hospitals like to do so. You don't want to wait in emergency room -- if the mother or if I'm sitting there with my kid for result, coming back from the centralized lab, I want to have it in 45 minutes. In 45 minutes, right? And I can tell you that the market is also broadening, right? And beyond what we are seeing, which we talk about a lot, it goes into many areas, right? We sold these machines into cruise ships, right? Because they have -- besides COVID, clearly, a lot of gastro topics to deal with. Having a final answer there in a quick turnaround type, is a business decision, right? We sold it to banks for trading floors. Other people want to know what's going on.

We should get one.

You can have one.

Perhaps then moving on to NeuMoDx. Can you just talk a little bit about -- I mean, obviously, again, the similar market where there's a lot of high throughput sequences of the company. Can you just talk a little bit about, again, how NeuMoDx in your platform for PCR, so the high throughput testing so to speak, is differentiated? And how we should think about that in the future?

I would say the platform is doing very well if you think about Europe, we clearly do have limitations in the U.S. What I mean we said is it's a platform which is clearly state of the art. As I said, 1-hour turnaround, where most competitors of ours at 4-plus hours. Random access, continuous loading, all the features we have fully interfaced with the cloud and your local network. So I think that is clearly, again, the benefits of a new platform. We also have a full menu for Europe, I think 13 or 14 panels now. In the meantime, it's everything what you need. In the U.S., we clearly are right now focusing on 1 panel plus LDTs, which is a nice market opportunity, laboratory developed tests. But we have to bring more tests through the FDA. And that is clearly also one area we are heavily, as you know, investing in and that will take some time. Nevertheless, of course, COVID gives us this time right now, because everybody is so much focusing on COVID also in the U.S., so I think that is probably incrementally positive for us. Nevertheless, there's an execution focus for us on that topic as well.

And perhaps, conscious of time, let's move on to another group growth driver for you, the digital PCR. [ Another thing ] you mentioned -- but can you just talk a little bit about how digital PCR, I guess, has found an application in COVID? And perhaps beyond that, then as well, how do you see digital PCR finding applications in other areas in the future?

Digital PCR for us as well as for other players in that market, which is 1 U.S. company, is a focus for activity, I think long-term also move more into the clinical market. Focus is clearly on the non-COVID side. While there are still applications people do research-wise on digital, there's a conversion story of the probably $2.5 billion existing qPCR market. So there's an existing market out, where from a customer perspective, for the same price point, you get better and more information with the digital PCR solution. And that makes it so interesting for customers to convert. Again, we are now more or less in our first year. We'll end with probably around $45 million in revenues, 600-plus placements. It's more or less exactly the placements another company is doing in our industry. So I would say a great start and more to come.

That's great. And perhaps then if we move on to perhaps some of the financial questions. If we can think a little bit about, first of all, the margin profile of QIAGEN. Can you just talk a little bit about how we should think about the margin evolving over the next few years? There's been, I guess, a lot of sort of restructuring programs and sort of refocusing programs, as we call it, as well over the recent past. Can you talk a little about how we should think about margin for QIAGEN over the next years?

Yes. As I said, in 2019, we clearly went out of our focus by that point in time, which is developing our own sequencing platform. And instead of doing so, started a collaboration with Illumina, where I think they're bringing their strength about the hardware, we bring in our strengths about consumable. And it's actually working out, I would say, for both quite well. Since then, we are very focused on our 5 pillars of growth and feel very comfortable with that. So even if you would do bolt-on acquisitions, this is clearly within that 5 pillars of growth. Nevertheless, I would also argue that in terms of margin development, we have industry-leading margins, but there's no doubt that the 33%, 34%, we'll see where we end up this year, is probably very much on the top of the whole industry, probably even on most sectors. But assuming what I said before is that we will have negative revenue growth for COVID next year, it probably has to come down somewhat. Pre-COVID, we had 2019 an adjusted EBIT margin around 27%. I think there's good reason to believe that we will be nicely above the 27%. Again, we have -- so what I'm saying is everything has to settle a bit in 2022 because we have to see how COVID, again, becomes endemic and which level. And once that happens there's, I would say, 3 reasons to believe that we should see ongoing margin improvements. First of all -- and this is probably the single -- or is an important component is gross margin development. While I would believe that gross margin for next year -- again, COVID disclaimer left and right -- most likely stays around what we have today because we made significant investments into production facilities, which are going to carry us nicely into the next few years. We are clearly having, in certain areas, a certain underutilization. So more volume over time is clearly going to be helpful on that. The same is true for mix. Clearly, that the normalization on mix is going to help us gross margin-wise as well. We are going to continue to invest R&D particularly around NeuMoDx, as I said before. But there's clearly significant leverage opportunities also going forward around SG&A for QIAGEN. And the one thing that we all have to recognize, the overall COVID situation is also having a significant impact how we interact with customers. And not only today, but also going forward. Now we have now 65% of our revenues coming in on e-commerce solutions, right, might be B2B, might be webshops, might be others. Particularly for a company like us, where 85% of our revenues are consumables/recurring sales, having this kind of interface makes a significant difference for our sales force in the day-to-day work. So there's nice efficiencies opportunities for us around that as well. So I would expect that once we find the space, there should be an ongoing margin improvement as in the past.

And then 90 seconds left, quick response perhaps on capital allocation. How should we think about capital allocation for QIAGEN and your priorities?

I would say that, since 2012, we actually have a fair combination of between investments, both on acquisitions and share buybacks. We just finished one more share buyback a couple of weeks ago. And typically, we do that in $100 million installments. And there's no reason to believe that there shouldn't be further share buybacks possible for QIAGEN. I think we said publicly on our quarterly call that we are working actively on bolt-on acquisitions. So there's opportunities on that within our focus areas. And let's see if we get that done. And I think a fair combination of that is probably also our goal midterm.

That's great. Thank you very much, Roland, for your time, and thank you all for attending this session. And we will close it there. And the next session will start shortly. Thank you very much.

Thanks for having us. Thank you.